Spot gold has turned more defensive intraday, breaching nearby support at 1190.51/1189.63 as the dollar firmed. The drop in silver below $14 for the first time since January 2016 is most certainly weighing on the yellow metal as well.

With that initial support level out of the way, scope is seen for additional retracement to the 1183.15/1180.92 area. This level is highlight by 61.8% retracement of the rebound off the mid-August low at 1160.27. Penetration of 1180.92 would put that low back in play.

20180911 Gold Chart

While the dominant trend remains decisively bearish and the short-term technical tone has deteriorated this morning, a measure of caution is warranted due to the massive and building short position in gold futures.

According to the 04-Sep COT report, the net short position for non-commercial traders rose 17,304 contracts to 34,256 contracts. Non-commercial and non-reportable traders held a combined net short position of 25,422 contracts, an increase of 23,844 over the previous week.

Despite the add to short positions, price pressure has been nominal thus far. With the market very much dialed into the COT reports, they are probably becoming a limiting factor on the downside and it won’t take much to ignite a short-covering rally.

We’re not going to worry about that too much as long as gold is below $1200. A breach of resistance at 1214.32/53 (28-Aug high and 50-day MA) would probably start making the shorts pretty nervous. Such a move would shift focus to the 1225/1230 area initially, but potential would be for a 38.2% retracement of the entire decline from the April high. That Fibonacci level comes in at 1238.58.

After a week of consolidation at the low end of last Tuesday’s range, silver finally took out the 14.00 level. With silver trading at fresh 31-month lows, the post-financial-crisis low at 13.63 (14-Dec-15) appears to be the attraction.

20180911 Silver Chart

We continue to eye persistent strength in the gold/silver ratio, which remains well bid over 85, near 10-year highs. While the ratio is overextended at these levels, there is nothing to suggest at this point that silver’s relative weakness to gold will end anytime soon.

Everyone is aware that a record short position has been built in silver, so a measure of caution is warranted here as well. Given that silver is a much smaller, more thinly traded market than gold, the upside potential could be explosive if those shorts start feeling a squeeze.

Platinum continues to consolidate around its 20-day moving average, trading modestly higher on the day. The inability to sustain yesterday’s brief probe above $800 keeps the dominant bear trend highlighted, but the recent low at 754.03 remains protected as long as closer-in supports at 773.00 and 764.72 are intact.

Palladium has backed off the recent highs after the 50-week (988.15 today) and 200-day (988.34) moving averages successfully thwarted upside progress over the past week. However, intraday losses have been limited thus far. I’m watching chart support at 953.50, which corresponds closely with the 100-day moving average (954.76 today). As long as this level is intact, I think we could still see $1,000.

The dollar seems to have found some footing in the wake of Friday’s U.S. jobs report. Both the euro and sterling were lifted yesterday after the EU’s chief Brexit negotiator Michael Barnier said that a deal was “realistic” within 6 to 8 weeks. However, the corresponding softness in the dollar was short-lived as markets look ahead to additional rate hikes this month and in December.

Those rate hike expectations along with persistent trade tensions will likely continue to limit the downside in the greenback. That in turn should continue to limit the upside in gold.


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