Gold Weekly: "It Could Get Ugly"

Gold

Lanci Gold Weekly - 12 August, 2018

Summary

Last week's gold activity was again lackluster, especially in light of ongoing turmoil in Turkey, escalating tit- for- tat trade war punches thrown by both the US and China, and an inflationary CPI on Friday. We are looking for a gap move either  lower  or higher Sunday night to get strapped in for a good trade. Anything else, and we will patiently wait. As it stands, our best metals trade last week was in Copper. That should give  you an idea of the short term opportunities we are avoiding for fear of "picking up pennies in front of a steamroller" down at these levels.... It will get ugly. But for whom is the question for us.

Gold's Nemesis ... Nemesi?

Remember the GBP collapse when Brexit was announced? Yeah... good times for gold  bulls decrying paper money.  Both the USD and Gold rallied....Do you also remember how that ended? Apparently funds remember as well as none are buying gold  as FIAT currency hedges. They are just plowing more money into greenbacks. And that makes sense.  The logic is simply that the problem  is how these countries are run, not with  paper fiat intrinsically, for now. Gold in USD terms does not benefit from Turkish Lira Debasement. Really, who in Turkey has any money left to buy Gold? If anything they will sell gold to raise dollars nationally. That is if  Erdogan isn't just smuggling the gold he has bought across a border. The USD is the reserve currency for payments globally. No need to look further

Emerging Problem in Turkey no help to Gold

Meanwhile Yuan Woes Continue

False Start

We had noted  last week that the PGMs and Silver were likely to lead in a rally, and for a part of the week it looked as if that were beginning. Platinum, Silver, and Copper all seemed to begin re-linking with the  USD/JPY currency pair, the most highly correlated FX pair in recent years. But that was not to be as trade related Yuan worries took command once again. This  was further  exacerbated by Turkey's Lira plummeting again to the point where Erdogan actually made  a patriotic plea to Turkey's citizens to 'convert their Gold into Lira and support their homeland'.

Emerging markets governments like Venezuela who have  sought Gold as a backup to their damaged FIAT have found repeatedly that while Gold has been de-facto re-monetized, it is  not a currency. So while Chavez may have gold on his country's balance sheet, bills and debts come  due in USD. That means those treasured Venezuelan safety nets were liquidated (first 5 minutes)to repay what is owed to creditors.

Speaking of Debt: Turkey has done no deleveraging compared to its other BRIC type brethren

But if you are a citizen  of those countries with a little gold  under your pillow, your life is being saved right now. Gold is NOT down in countries that have had reality checks with FIAT debasement. And we (that is, several on the OT trading team) expect Erdogan to use capital controls, including Gold confiscation if things don't turn around there.

Venezuela Isn't The End

We have seen just that in Venezuela, and suspect that while Venezuelan selling may actually have finished  a month or so ago, other BRICs are also selling gold for  USD to pay their own debts. We also feel strongly that the last 3 months  of selling was also in part GoldCorp (GG) getting its hedge book correct before its disastrous earnings miss. And if GoldCorp, a top tier miner, was underhedged, then expect others to be as well. But the news is not all bad.

Short- Sighted: Commitment of Traders

The CoT report has been well overweighted to the bearish side these past few weeks, implying too many people are on one side of the boat and an unwinding is near. This has been the mantra of Gold and Silver bugs for  a month now.

Yes, the risk may be asymmetrically bad if you are playing  metals from the short side. Yes the next 2% may be lower, but the next 7% should be higher. But we ask those people, "What is the catalyst". Metals investor sentiment has been demoralized these past months. An inflationary CPI on  Friday that utterly wiped out any real earnings gains for the working man saw the Bond market rally?

But here it is again. The CoT through Tuesday continues to trend towards more shorts piling in. The difference is that the market did little to the downside compared to previous  increases in spec shorts.

Since January, gold futures speculators have been trending from extremely bullish to  short. And in the week ending last Tuesday (the most recent data available) they may have capitulated,  net adding to shorts on the spec fund side short positions. If their is one thing that has been a great indicator of extremes and reversals, it has been the CoT report for the last 10 years.

Silver looks even better

But before you go out buying Gold or Silver, ask yourself: "Why is this gold selloff different than all other selloffs?" The answer is Trade Wars. And yes, if/when they get some relief, we could have the mother of all short rallies. On that note. Here is what we have on our radar:

Radar Love

Dec.Gold 4 hour chart

Buying Dips: Feel free to do so above contract lows with a tight stop if that is your style. We don't catch falling knives, and frankly miss many trades because  of it.

Buy Strength: On a technical basis we will pay close attention on a rally between $1225- $1230 with an eye on volumes. Above $1229 and we will likely get a Vector Signal for expanding volatility. This would generate 2 trades. Buy the rally, and if stopped out, sell the reversal. The Vector System is almost infallible in calling inflection points in markets. If $1229 generates one, know that the market will repel that price one way or the other. Vector signals come in all  time frames including 60 and 240 minute, Daily, Weekly, and Monthly. If Gold hits $1229, we will be on alert for a 3 to 5 bar trade in whatever time frame it is generated.

Sell Strength: Again, trading the range in Gold is where it is at if you have the patience, selling rallies and buying  dips (not necessarily in that order) have been the more profitable trades this past month. Face it, the market has flatlined in a range. Its the bottom of a range, but it is a range.

Sell Weakness: We do not advise this using futures. Because Gold  and Silver  have  a history of flat-lining near lows... then a massive  selloff comes out of nowhere trapping short term momentum players, and that's it. You have your catalyst for a rally. The commercials cover the rest of their shorts, the weaker spec funds are now short, and the pain begins. If we  sell weakness at these levels, it would be expressed in long a put or put spread. Volatility is low for a reason. But we think a next leg lower will not be met with lower volatility at all. It will be the death of those unhedged producers and they will likely rush in to hedge. This would give an added kicker to a long Put position in a down swing.

All of these are on radar. None are definite  trades. Short term active trading is  frequently path dependent. Strategies may remain in place, but tactics and expressing those strategies can change in real time. That is what OT's Live Stream chat is for

 

Silver

Silver is very interesting to us going into Sunday. Reports of physical demand out of Asia basis $1530 spot have been verified. Friday again saw silver close in that area as we feel some  stop fishing and maybe table-setting for a Sunday swoon was put in play.  Sunday night will be a potential opportunity for those with strong constitutions.

Spot Silver Daily Chart

What could happen:

  1. The Buyers return. Result-  Silver repels the area immediately
  2. The Buyers are patient content to move their level lower. Especially if spec players are leaning on their bids - Result - stops are run and the market drops harshly until the physical demand level is found again.
  3. The market opens flat and goes nowhere

We are looking to trade it if it moves either  way Sunday night. We will not step in the middle of a Mexican standoff.

  • Buy Strength - preferably if we gap higher in US and attempt to fill that gap
  • Buy Weakness- Not our style.. we will consider buying a reversal off initial weakness. Specifically if $1530 were our number, we'd watch if spot comes in  lower and depending on the path, look to buy if the market rejects the initial selloff and pops back through $1530

Related:

LGW for August 5th, 2018

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About the Author:

Vince Lanci has 28+ years’ experience trading Commodity Derivatives. Through his Echobay entity, Mr. Lanci manages family assets and advises multi-billion dollar macro funds on Gold strategies. Over the years, his expertise and testimony have been requested in energy, precious metals, and derivative fraud cases. Lanci is known for his passion in identifying unfairness in market structure and uneven playing fields. He is a frequent contributor to Zerohedge and Marketslant on such topics. Vince contributes to Bloomberg and Reuters finance articles as well. He continues to lead the Soren K. Group of writers on Marketslant.

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