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Monthly Technical and Precious Metals Positioning Report - Gold - April 2020

28 April 2020

To view this report in PDF format, please click here.

Gold – In Brief

Gold and global equities rocketed higher from the lows, perhaps in the overall monetary response to the coronavirus. The IMF estimates that monetary stimulus, fiscal expansion, and debt forbearance amount to around 9.50 pct. of global GDP, or US$5 trillion USD (see Johns Hopkins CSSE for the latest data).

US Steel production – 33 % down from early January, oil rigs – 43 % from early January, mortgage applications -43 %, 26.50 million jobless claims processed since mid-March, expected Q1 GDP -3.50 % (source: Bloomberg).

A Tale of Two charts…
‘It was the worst of times and it the worst of times…’ to mangle Dickens just a little bit. As Coronavirus forced the shut-down of a number of large refineries, a shudder of fear passed through the Comex shorts as concerns rose over the ability to deliver into April and subsequent contracts, causing the contango to spike aggresively. The Daily chart below captures some but not all of the carnage, as it obscures some of the intra-day peaks. With June delivery some two months away, uncertainty is likely to keep spreads high and volatile.

Crude saw the problem in reverse: with titanic demand destruction causing a flow of WTI into Cushing, which rapidly hit ‘tank tops’ if not literally, then at least figuratively in terms of leased space. As WTI became spot physical delivery, prices crashed into negative territory, swinging into the minus thirties before recovering…Brent, by far the more international contract, does not have the same storage constraints as West Texas, traded down to (positive) US$15.98 as June WTI made a same-day low of US$6.50, possibly driven by traders fearing a repeat when the June contract rolls into settlement. 

Technical Analysis Graph 1
Both contracts display massive contango, but it made more ‘visual’ sense to subtract the June WTI from the May contract to imply the depth of the discount at physical delivery (source: Bloomberg).

Technical analysis Chart 2
Money and Interest Rates
Quick Overview of Managed Money Positioning in Gold
Managed money length declined by about another 0.95 million FTozs in the weeks spanning 17th March to the 21st April, and therefore reduced by 12.25 million FTozs since the 18th of Feb peak. Managed Money shorts reduced by 1.113 million FTozs, buying into the recent rally. Since the 21st of April, total Open Interest has shrunk by about 6,270 lots, or 0.627 million FTozs, which looks like the buyers have returned to some extent, although volumes were quite light.

Gold Positioning and Volume-Weighted Average Pricing
The last six weeks have seen long liquidation from Managed Money continue in aggregate. There has been a tentative increase in managed money short through April. Gross length was last at these levels (15.55 million FTozs) at the beginning of June 2019.

Technical Analysis Graph 4
Weekly Ichimoku Cloud Chart
The hammer candle in the week ending the 17th of April implied a weakening trend, but after a soft start, gold rallied to almost challenge the previous high, so let’s assume that’s a spurious signal for now.

Below the recent high, look for support at US$1634. Support from the Weekly Turning and Standard lines comes in at US$1600, and the 50 % retracement of the move up from the mid-March low.

Technical Analysis Graph 5
Daily Ichimoku Cloud Chart
The daily chart reveals the huge volatility in March-April, and the support level from the October – November lows.

Some short-term support at US$1699 from the Daily Turning line, then US$1650 from the Daily Standard line. The clouds are bullish.

Technical Analysis Graph 6
Daily Point and Figure log 1 %
Using the 1 % box size the current column is bullish, however there are no targets above the US$1708 level, and that price has clearly been achieved recently. Using different box sizes and different time frames you can get plenty of upside targets, but the 1 % has been a steady guide to the long-run evolution of the price. 

Technical Analysis Graph 7
Gold Hourly Point and Figure – Medium Term
The trend is upward, but it is interesting to note the number of counts that congregate around the US$1435-1475 level, which was reached by the 14th of April. This suggests that the market has expended energy to reach this point and that unless gold see a new item of news that propels a clear break out to the upside, the tendency may be for weakness. Right now however, the trend is positive.

Support at US$1683-86, then the most aggressive downside target intersects the 50 % retracement of the March-April rally.

Technical Analysis Graph 8
Price Targets via Point and Figure – Short Term
The US$5 box size still giving a good overview of the market in the short-term, Congestion in the US$1665-1685 zone provides near-term support.

Technical Analysis Graph 9
The Inflation-linked Bond Yield & the US Yield Curve
Gold appears to be somewhat ahead of the 10Y – 3 mo yield spread, but probably helped by the spike in financial stress

The spike in the stress index seems relatively benign compared with the GFC, however it’s a trade-off between the size of the stimulus so far, and the likely impact on bank balance sheets and access to fixed income markets as the size of the economic contraction plays out in Q4 2020 and beyond?

Source: Bloomberg, St. Louis Fed. Reserve

Gold Prices and the Yield on the April 2028 US Inflation-Linked Bond
The spike up in yields hit gold hard in late March, but the recent decline in the inflation-linked yield is supportive of gold.

Technical Analysis Graph 13
Gold-Silver Ratio
The likely range in the near term appears to 106-117, with a target up to 130/141, which I would have considered spurious if it wasn’t for the recent history of 127. For believers in mean-reversion, the 12-month average is 92, and the 5-year average is more 80 than 79…

Technical Analysis Graph 14
Given that the recent history of industrial and investment demand for silver seems to say very little that is informative at first glance with regard to the ratio, the chart below shows how the ratio is driven on the margin by the relative open interest in COMEX, when open interest is measured (in rough) US$ terms/

Technical Analysis Graph 15
Equities - the SPX
The fantastic rebound looks like running into resistance at the Weekly Cloud top and the 61.80 % Fib retracement.

Note that the price has narrowly exceed the price target on the Daily point and figure below. The next target is 3,041 which is roughly where the Cloud top is located in early June.

Technical Analysis Graph 16
SPX Hourly Chart with Targets
Running into trendline resistance now and has hit an upside target. Weekly correlations over the last twelve months have increased to 0.53 for gold and 0.74 for silver, so watch for any equity weakness.

Technical Analysis Graph 17
The Dollar – DXY 
January 2017 highs proved tough for the DXY. Weakening towards 97 again?

Technical Analysis Graph 18
AUD Weekly Cloud
The ‘slight rebound’ has proved to be quite aggressive after a strong short-covering rally after pretty much touching the major 0.545 target.

Resistance expected at the 0.646 and 0.684 level.

Technical Analysis Graph 19
The AUD Hourly Point and Figure

From last month: “Showing price action from mid-March onwards, this excerpt from the Hourly Point and figure indicates the chances of a recovery back to 0.62 and 0.651 within a longer-term bearish structure.“ Targets below extend to 0.66/0.67 before running out, suggesting that the powerful rebound may be in its final phase? (Hostage to fortune alert!)

Technical Analysis Graph 20
Positioning in the AUD vs the USD
A sharp reduction in non-commercial short positioning since early March.

Technical Analysis Chart 21
Note that so far there has not been an accompanying increase in long positioning, suggesting that confidence in the AUD is a one-way thing at the moment, and that shorts who had sharply increased their positions at a VWAP of 0.6634 and 0.6720 started buying back as a group at 0.619 and 0.586.

Where to from Here?
After a huge round of volatility and a counter-intuitive drop in mid- March the market has rallied on a return to lower yields, large scale fiscal actions, and a continuation of massive jobless claims in the US all imply support for gold.

Data shows a steady withdrawal from the COMEX market by Managed Money speculators from the February commitments, with gross long positioning around 55% of the recent peak.

Technicals are bullish, but it is reasonable to say that they allow for a move lower in the price. This allows for those who are bullish to be patient.

The recent run up in US equities may have reached the top of the post-dip recovery.

As ever, news flow around Coronavirus and the re-opening or otherwise of major economies will dominate asset markets.

Tehnical Analysis Chart 22

The information contained herein is based on data obtained from sources believed by ABC Bullion to be reliable. However, such information has not been verified by, ABC Bullion, and ABC Bullion does not make any representations or take any responsibility as to its accuracy. Any statements of a non-factual nature constitute only current opinions, which are subject to change without notice. ABC Bullion (and/or its affiliates) may have positions in commodities referred to herein, and may hereafter liquidate such positions. Neither the information in this report, nor any opinion expressed, shall be construed to be, or constitute, a recommendation or an offer to buy or sell, or a solicitation of an offer to buy or sell, any commodities or other financial products mentioned herein.