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

15 November 2018

Gold - In Brief

Gold’s rally failed to close above the 38.20% retracement of the whole April-August price drop and came to a stop right at the Weekly Standard Line (US$1243.20) before dropping sharply to the Weekly Turning Line at US$ 1212.19, where the price found initial support, enabling a rebound before touching the US$ 1207 level just before Armistice Day.

Gold faces headwinds from a sharp rise in real yields, as proxied by a US Treasury Inflation Indexed bond maturing in April 2028, and a general continuation of the Dollar rally.

Mid-terms resulted in a Democrat-held house and a Republican-held Senate. Further tax-cutting is unlikely in this environment, which probably favours gold as another late cycle fiscal boost from that direction would probably encourage the Federal Reserve to step harder on the brakes. At the same time, both parties might cooperate over infrastructure spending in the second half of the presidential term so don’t expect much fiscal probity to emerge.

US equities found support right at the bottom of the Weekly Ichimoku cloud before rebounding to the 61.80% Fibonacci retracement of the October-November drop, where the rally stopped abruptly, and the market weakened again. The critical levels are 2,675 and 2,639, then the band of support since February of 2,535-2,600 (see the mini-chart squeezed in below).

Weekly Ichimoku cloud  
 

The Inflation-linked Bond Yield

The steep rise in US real yields as proxied by the yield on 10-year Treasury inflation-linkers is a negative for gold. The chart below shows the break out above the ranging levels seen from February to October of this year.
Yield on the April 2028 Inflation Lined Bond

US Dollar (via the DXY Index)


The period since the last report has seen a decent rally above technical resistance at the Weekly Ichimoku cloud top. Resistance expected at 98.00.

Strong non-farms in November confirm the strength of the US economy and the expected tightening trajectory of the Federal Reserve through 2018/19.
 US Dollar
 

Gold Positioning and Outlook

Gold positioning on a net basis has reduced from the extreme short on the 9th of October (-10.945 million FTozs short) to -4.745 million FTozs short by the 6th of November as Managed Money shorts reduced aggressively in mid to late October.

Positioning by Managed Money longs declined to 8.219 million FTozs by the 6th of November, and the message is that there is no powerful influx of ‘believers’ into the market since it rallied off the lows. In fact, longs have exited the market to the tune of almost of 2.50 million FTozs between the 21st of August and the 6th of November.

Since the 6th of November, Open interest increased from 494,911 contracts to 521,384 contracts, with the bulk of the increase taking place on the Friday and Monday (see CME Group Gold Futures Settlements) and given the sharp declines in prices seen on those days, it suggests that short sellers have increased their positions.

The estimated VWAP for the period 7th-12th November was US$1219.46, so as of now, recent shorts look comfortable.

It does add to the overall negative sentiment if viewed from the perspective of professional positioning. See the chart below for a graphic of positioning.
 

Managed Money gold long and short positioning on the CME

Managed Money gold long and short positioning on the CME

Weekly Ichimoku Cloud Chart

Weekly Ichimoku Cloud Chart  
Gold’s rally from the lows has been muted, fading without closing above the 38.20% Fibonacci retracement before heading sharply lower.
 
Ratio of gold shorts to long term average: still high
Ratio of gold shorts to long term average
Gold ETFs
A small inflow into total ETF positions with total holdings 68,503,735 FTozs recorded as of the 9th of November, an increase of 591,326 FTozs since the 18th of October.
 

Where to From Here?

After peaking at US $1243 and failing to close above the 50% retracement of the June-August down move, or the 38.20% retracement of the April-August down move, gold has cycled back and looks like moving back to test the Daily Cloud at the critical mid-US$1190s.  

After the initial sharp rally, consolidation towards the Daily Cloud top has occurred, and possibly a little lower. However, the overall trend is still positive on the Daily Cloud charts and the Hourly Point and Figure chart (from which the above targets are derived).
 
Resistance    US$1285     Weekly Cloud Base
  US$1235   Weekly Standard Line
  US$1235  50 % retracement of the June-August retracement
Supports    US$1194 Daily Cloud base
  US$1192  61.80 % retracement of the August-October rally
  US$1179  Target on short-term point and figure chart


Short Term Targets?

Targets    US$1292  
  US$1262  
  US$1221    If the price stays above the recent low of US$1196, any rally will target US$1221
  US$1197-1201  
  US$1191  
 

Short Term Point and Figure

The chart below shows gold swinging into a downtrend and displaying  some striking downside targets. Let's discount the remoter ones for now.
 
Short term point and figure 

Medium Term?

The point and figure chart below, which has been optimised for recent volatility, displays a significant number of downside targets. At a spot level of US$1203, the options market is pricing in a 1 in 4 chance of US $1181 or lower in 1 month, and a roughly 1 in 7 chance of US $1168 or lower (on the upside, US$1287 is priced at 1 in 25).

Comparing this with the medium-term chart in the previous report demonstrates how almost all of the upside price targets got ‘knocked out’ mainly through a change in the parameter box size, and that the market has just fulfilled the last target on that chart, by moving down through US $1199…

Medium term

Summary – the Likely Outcome for Gold

Gold’s rally ran out of energy earlier than expected.  Longs have reduced, shorts reduced too, before stepping in again, in a background of strong payroll data, a continuation of USD strength and concerns that the Fed might over-tighten.

Below US$1240, gold still trades in a weak manner, for the reasons described in the opening paragraphs. In the absence of an external shock, those drivers are likely to continue to dominate gold’s macro performance through Q4, with the market likely to range somewhat indecisively below US$1240.


Nicholas Frappell
Global General Manager
Nick
 
Disclaimer
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.