Lanci Gold Weekly for August 26th, 2018
- CoT report shows commercials now moving off short positions
- EM currency crisis goes global
- Trade talk fail and Sep. 5th tariff imposition loom for USD/CNY pair
The first half of the week saw shorts begin to cover as the US/China trade talks moved forward; the rationale being that an amicable resolution would make the "risk on" crowd comfortable and lessening USD strength. Gold went as high as $1208.40 on Wednesday in response to this.
Thursday, Gold stumbled as the greenback rallied again. The resulting swoon down to $1190.20 happened just before the announcement that no trade agreement was forthcoming.
Friday morning US time, the PBOC quickly announced they would continue to use "counter-cyclical" measures to stem the Yuan's sell-off. This announcement combined with a PBOC capital controls statement sent Gold higher as the USD/CNY pair is Gold's current focus.
Daily gold futures chart says $1229 in sites, but from there watch out:
As the day progressed, we got Fed Chair Powell adding fuel to the fire with statements like "we're not concerned with inflation now". In conjunction with an almost relentless get me out before the weekend market mentality drove gold to a weekly high of $1215.40 before pulling back to close at $1212.30.
Trading Comments for Next Week
Bull Take: Another dip to $1190.4 is entirely possible, and still would be within the bullish view. To be fair, a dip to $1180.7 still does not negate a bullish position. That said, we won't be buying $1181.00 based on our own style. A monthly close above $1229 would be amazing and the place where short term longs would likely sell while longer term ones would add. There would be commercial related selling there for sure as well.
The Weekly Vector alerted us last week the risk was in being short. That was prescient. (Dec. Gold)
Last Sunday: Requiem for a Weekly Sell Signal
The weekly chart gave us a Vector Trend Momentum signal lower three months ago. We captured only $10 of this massive move for our clients, due to shorter term time frames; but the signal kept on going.
There really was no true volatility, just trend post this signal. Gold and all its metallic brethren marched in one direction, lower. Gold actually held up better than Silver, the PGMs, and Copper due in no small part to its remonetization. But now, that signal has finally said: ” If you sold when you were supposed to, it is time to get out of those shorts”. This is based on several factors, the most obvious being the red line crossing over the blue at bottom of the chart above. So, yea, it could go lower; but one spot on signal is now a dead soldier saying “Get Out”. Full report here
Gold This Sunday:
If the low at 1167 is maintained, Gold has just turned very interesting. It puts a longer term view of $1600 back on the table. That said; We are still in an $1150 - 1350 trading range for 5 years.
Bullish ahead for the week:
- resolution of trade war w/o tariffs
- yuan continued strength more important than USD/JPY/ EUR pairings now
- monetary policy outweighs fiscal events
If September 5th comes and there is no trade resolution, then the US tariffs would be imposed on China. That is enough to cause a violent reversal and take out the lows putting $1140 easily on the table. Regardless, even if this is a short covering rally, the investment sentiment has been damaged enough to dissuade more fresh money from coming back for a while we feel.
Bearish ahead for the week:
- no resolution on trade war
- fiscal outweighs monetary
- continued EM issues force more IMF involvement and gold sales
Still lots of room below on the monthly. (Spot gold):
US Politics: Political uncertainty surged higher this week after members of President Trump’s inner circle were convicted of various fraud and campaign crimes. The impeachment thing is happening again. Regardless of your politics, it increases uncertainty. BULLISH
The President’s continued attacks on the Fed, and the resultant need to reinforce their own independence. Powell's comments on Friday completely ignored the President's admonishments as they should, and put the USD under some pressure for the first time in six months. Players may continue to close out their record short gold positions in no small part because POTUS' fiscal fire and brimstone may not have market forces behind it. NEUTRAL
Trade Talks & Central Bankers: Ongoing trade wars and CB jawboning are starting to play havoc with the FX markets in general and the USD/CNY pair specifically. Talks ended with no resolution and the USD began discounting this by rallying the night before. Then China's PBOC makes 2 announcements: stronger Yuan and capital controls. Powell talks the USD down adding fuel to Friday's rally. VOLATILE and BULLISH
The 240 minute system setup says be long with a $1205 stop:
EM Currency Contagion: EM volatility is increasing across the board as markets remind us you cannot have internati0nally intertwined economies dependent on trade without reciprocal international problems if a trade partner decides to change policies. BEARISH
Why EM Problems are Good and Bad for Gold
FX volatility in EMs are on the rise... and this is why Gold will benefit as an imperfect hedge for everything. That is the long term statement. In the short term, those EM countries who need USD to pay bills will sell their Gold to raise reserves. That is bearish.
The current EM crises are a function of money velocity slowing in their smaller FX floats (liquidity issues) from looming trade barriers. This is not bullish for gold in USD terms. Whether you are a country ravaged by inflation, or a solvent (but illiquid) country that needs USD to pay debts, you have to get your hands on USD.
Not only do these countries have to sell their precious stores of value to pay debts, but China and Russia, whose currencies have also debased vs the USD will not be bid as high as they once were for physical metal. This is what we have been seeing since May 2018.
Ironically, this economic warfare we are seeing to strengthen the USD reserve status is likely just raising awareness among other countries that they must not be held hostage by another sovereign sooner rather than later. This forces the issue, and will we feel expedite plans for de-dollarizing where countries can. That is how gold benefits.
Commercials positions are moving away from short side now in a big way.
Keep in mind the CoT report data is only through last Tuesday, well before the Friday fireworks. Otherwise this story is a dead horse for grabbing retail eyeballs over a month now. Old news... move on. Catalysts are the key now.
If this is your first time reading Lanci Gold Weekly for the OpportunisticTrader.com, and you are an active trader, we'd kindly ask you to read previous reports to get a better feel for the Vector Volatility System (VVS) we rely on so heavily for our own trading. It generates signals based on a market's volatility cycles over different time frames. When a market is "ripe" for a range expansion, VVS then generates risk/reward numbers in a risk 1 to make 2 ratio. VVS's uniqueness is in its limiting market exposure not just by price, but also by time. If a trade is entered and not in the money after 3-5 bars, the signal self -negates. Previous reports here.
Last week the team at Opportunistic Trader took $21.00 out of the Gold market and posted trades as they happened in real time. Gold had a good week for us, and Oil, Google, ES, and FX pairs all were discussed and traded. The profits in gold were made from both the long and short side by traders running money and advising macro funds. Totals over 5 trades in gold for the week were: $7.00 and $2.00 from the short side; and $9.00 and $3.00 from the long side.
A view of the OT's real time trade chat room for subscribers.
This week our VVS is not going to be easily followed as the micro and macro are opposing forces as of this writing. We think other markets and trading approaches will likely be in the spotlight. Specifically for gold, the axiom "gold hates the teens" is now in play again. And this comes in just as our 4 hour signal (pic near top) is telling us to get long right below the "teens". It may be a swing-trader's week as volatility continues to expand, but the chop increases.
The work in these reports is the basis for our own trading, but decision analysis frequently comes on the fly especially in a path dependent system like VVS. It is quite unsettling when you are long on a VVS buy signal and a market wizards legend and team leader is shorting in your face on an RTM type trade.
The point is, real time community collaboration has served us well at the OT. Even though we are regarded as experts in gold and volatility, we benefit from the expertise our colleagues add in their respective markets like equities, FX, energy, and grains.
Final-Final Thoughts for Monday
For us it will be all about the USD as usual. But the difference now is it is all about the USD/CNY pair. The EM problems will hold gold back in USD terms unless the FIAT issue hits the US. But it will not hit the US, as the IMF will protect the EURO and USD with more indentured servitude impositions on EM countries. Meanwhile, ask any Venezuelan or Turk individual with an ounce of gold under his pillow how he feels and we'd bet that person is happier with gold than without it given his own nation's financial state.
Don't be surprised if gold tries for $1229 before the September 5th tariff imposition date on trade deal hopes; only to fall out of bed on EM crises exacerbation. Gold is getting interesting now. And that means it will start being trade-able shorter term we feel if last week was any indication.
Those looking for that rally to the moon won't see it, if at all, until the US government admits that a strong USD is bad for a country of consumers with no money left to spend. Then you will see stocks drop on earnings misses and recession hits stock prices. Until then, it's just a trade.
About the author:Vince Lanci is Managing Partner at Echobay Partners LLC since 2008. Through Echobay, Mr. Lanci manages family assets and advises multi-billion dollar macro funds on Gold strategies. In 2017 Mr. Lanci co-authored a UConn paper on Energy Volatility with Prof. Robert Biolsi. From 2004-2008, Mr. Lanci was Co-Head of Metals & Energy Trading for CiS Options LLC where he ran the long-short and vol-arb portfolios for CiS’s parent LP fund. From 1993-2003 Mr. Lanci owned and operated Berard Capital LLC option marketmakers. In 2000 Mr. Lanci co-founded Whentech with David Wender (originally named Upperhand Technologies LLC) where he co-designed and was chief architect of “Pit-Trader" user logic. Between 1987-1993 Mr. Lanci gained experience at Lehman Bros and Cooper Neff.
Currently, Mr. Lanci is seeding a long-short Gold & Energy Fund. He is co-authoring two university papers: one on WTI "carry" risk; the second covers Carbon Offset valuation with John Cleland of the Renew West Fund. Mr. Lanci contributes to Zerohedge, Kitco, BBG, and RTRS. He panels NYC Mines & Money conferences and is a champion of level investor playing fields.
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