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Monthly Technical and Precious Metals Positioning Report - Gold - December 2018

18 December 2018

Gold – In Brief


Gold has experienced a sustained period of short-covering as Managed Money shorts on the CME unwound 4.95 million FTozs in the month since November the 13th, a process which has taken gold above the important US$1238-1240 level and almost halved the size of the short bet against gold since August the 21st. The price has broken above previous highs and above the important retracements mentioned previously that had acted to cap the previous rally.

The background to the ongoing rally in December relates to a change in sentiment aided by a series of move dovish pronouncements emanating from Fed officials in the period since mid-November and into December.

November 16th, speaking to the WSJ, the Philly Fed President Patrick Harker, an FOMC voting member in 2020, said “At this point, I’m not convinced a December rate move is the right move, but I need to watch the data over the next few weeks before determining whether it is prudent to boost the cost of borrowing again.”

December 6th Atlanta Fed President Raphael Bostic, currently voting on the FOMC said in a speech “I currently think we’re within shouting distance of neutral, and I do think neutral is where we want to be.” (The ‘neutral’ rate and where it truly lies is of course a highly contentious matter.)

There were many other comments in a similar vein, suggesting that the tightening cycle in 2019 may converge downwards to two rate rises.

Additionally, equities dropped sharply with the S&P 500 falling away from the 61.80% retracement (2,811 on SPX) that it banged up against on the recent rebound as declining crude hurt oil stocks. Major tech stocks that had led the market on the upside also weakened dramatically as investors reacted to the possibility of supply chain disruptions arising from the Trump-led trade dispute and growing concerns that future operating cash flows will be impacted by tax liabilities arising from overseas earnings that have yet to be repatriated to the US. The S&P 500 is ‘just’ about hanging on the Weekly Cloud base but has made a new low, and any weakness below this level opens the way to a more dramatic decline.

The weakness in equities does not translate into instant gold strength but is important in terms of competing asset classes.
 

The SPX

Now down below the weekly cloud base and making fresh lows. Rallies capped at 2,820, with downside targets to 2,555-2,570, and on to 2,300?
 
SPX 
 

The Dollar – DXY

The Dollar Index has stopped twice just shy of the expected resistance at 98.00, making a recent high of 97.71. The continuation of trade friction – or outright conflict – between the US and China has helped support the Dollar.
 
DXY
 

The Inflation-Linked Bond Yield

The steep rise in US real yields as proxied by the yield on 10-year Treasury inflation-linkers has been negative for gold. The chart below shows the break out above the ranging levels seen from February to October of this year. The yield remains high, however recent price action shows the yield dropping away from the 1.20% level, which is positive for gold.
 
The Inflation-Linked Bond Yield

Gold Positioning and Outlook

As of the 11th of December, shorts are 9.00 million FTozs, with Longs at 8.99 million FTozs.

Gold has yet to see a marked inflow of fresh longs. However, there has been a significant reduction in managed money shorts. Net positioning is now essentially ‘zero’ as of the 11th of December. Short positioning is still twice the long-run average, and it would be reasonable to expect those positions to diminish towards the end of the month.

Above US$1214, shorts started to get defensive. They have bought back 10 weeks out of the last 11 reporting weeks on the CFTC.

Recent positioning and VWAP has been as follows:

 
Reduction        Gross positions            VWAP in US$
-1,919,300       -9,000,800                   1,247.31
-2,918,100       -10,920,100                 1,228.91
217,500           -13,838,200                 1,224.26
-2,251,600       -13,620,700                 1,214.19
 
 

Gold ETFs


Total gold ETFs are 69,581,903 FTozs as at December 14th, an increase of around a million Troy Ounces, showing increased interest from investors.
 
 

Managed Money Gold Long and Short Positioning on the CME
Managed Money Gold Long and Short Positioning on the CME

Ratio of Managed Money Gold Shorts to Long Term Average: Normalcy Makes a Return
Ratio of Managed Money Gold Shorts to Long Term Average

Weekly Ichimoku Cloud Chart

The Weekly Chart shows that gold remains bearish, however it has closed above the 38.20% Fibonacci retracement at US$1236.81, something it could not do in the October rebound, and this is positive for gold. The next big retracement to reach is the 50% retracement at US$1262.77.

Weekly Ichimoku Cloud Chart
  

Daily Ichimoku Cloud Chart

The daily chart IS bullish, with the price, the standard and the turning lines all above the daily cloud. The price has rolled back away from the 61.80% Fibonacci retracement of the June-August down-move but remains in an upwards-trending channel.
 Daily Ichimoku Cloud Chart


Price Targets via Point and Figure – Short Term

The price rallied towards a multitude of new upside targets, making a high of US$1251, look for a test of the Weekly Turning line to be supported.
 

Short term

Gold Hourly Point and Figure – Medium Term

Switched to a bullish trend and targeting the 50% retracement at US$1262.

Medium term
  

Where to From Here?

Gold has benefitted from the rapid re-appraisal of the path of Fed tightening, which has moved away from concerns of ‘over-tightening’. Overnight the market lifted on the back of another tweet from President questioning the Fed’s choice over the December rate decision.

Gold remains in an uptrend on the daily clouds, but still has a tremendous amount of work to do to shake off the longer-term down trend visible on the weekly chart.

On balance, I expect gold to outperform in Q1 now.
 
Resistance  US$1285   Weekly Cloud Base
  US$1263 50 % retracement of the April-August down move
Supports  US$1224 Weekly Turning Line
  US$1212 Daily Cloud base
  US$1183 Recent lows
Targets  US$1268  
  US$1262  
  US$1255  
  US$1227  
 

Summary – the Likely Outcome for Gold

 
The move through US$1240 has the potential to galvanise gold as it breaks out of the recent range and the recent narrative of weaker prices helped by highly significant bets against gold on the CME.

Initial targets have been met as gold weakens back from the US$1252 area. Further short-covering is likely ahead of the year-end.

Politically, the end-game for the Mueller investigation is closer than before, and the although the Dollar remains in a positive trend, expectations are for lower next year.

Gold is in a moderately positive framework, and Q1 holds the promise of higher levels.

The key level for gold in US$ terms are:
  • US$1262 and US$1366 on the upside.
  • US$1181 on the downside.
 

Nicholas Frappell
Global General Manager
NicholasDisclaimer
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. to date is retreating.