December gold futures have had quite the slide over the past few days, and it’s all attributed to a stock market rally on a possible phase 1 China trade deal, and a technical breakdown against key support levels. Investors are now taking a more risk on attitude as the market sentiment is that nothing can derail this rally. The possibility of at least the first step in the trade talks looks good, but nothing has been said from Trump confirming this. The precious metals market is reacting to any piece of news on trade talk progress on a daily basis, and I think overreacting in the most recent selloff. December gold is likely to head lower at least in the short term, down to $1425. This is assuming that nothing comes out to negate the progress the U.S. and China have made in recent days. It seems that a simple tweet is enough to throw a wrench in any trading strategy, but we must look at what we know today. I think traders should be looking at trading gold from a technical perspective and keeping in mind the noise that could derail the strategy and be ready to react accordingly. Traders looking at trading gold but don’t want to fully step in should look at the smaller gold futures contracts from 33 and 50 oz contracts. Building an outright long position in gold right now isn’t suggested, but as soon as the trade talks are fully confirmed “in jeopardy” and at risk of going south trade the trend.
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December silver is trying to find support as it pressured by improved trade talk. The gold/silver ratio is around 86.60 relative to what it was in July of this year, hitting approximately 93.39 on weekly bases and the most recent low 79.30. Given the sizable long position on silver, any bearish news will force weak longs to exit the market. One aspect to pay attention to in commodities is that they have been heading higher since they made recent lows in Oct 2019. What I’m referring to is the (Thomson Reuters/CoreCommodity CRB index: google it). My thought is that down the road, as broad commodity index rise, inflation could creep up to support the metals, silver will benefit from it. Silver traders should pay close attention to inflation readings.
From a technical perspective, a closer look shows that momentum is turning down. A close above 18.00 is needed for new fresh longs to come into this market. The COT will be released this afternoon from the measured on Tuesday. We shall see the long reductions.
Oil prices have come off their recent high and have made what appears to be a temporary top after perceived U.S.-China trade optimism. China has been insistent on substantiated tariff relief as part of the ‘Phase-1’ deal, which would set to ease broad global demand concerns. The trade has largely discounted that Chinese crude oil imports posted an all-time high of 10.72 million barrels per day with year over year imports up more than 11%. OPEC Secretary General noted that that the oil outlook for 2020 is favorable, with no immediate need for further cuts and renewed focus on compliance. This comes amidst yet another jump in EIA crude oil stocks of 7.929 million barrels which are 14.995 million barrels above year ago levels. Despite oils recent reflation in price, volatility continues to break down with the OVX near the 31 handle. The market remains bullish trend but has pulled back from the top the range with today’s range seen between 54.16 – 57.96.
Dec ’19 coffee futures continue to rally as this market news shifts to production. According to some reports there could be a global deficit of about half a million bags for the 2019/20 season and managed money is still net short 45,692 contracts (as of the Friday Nov 1st COT summary) leaving plenty of fuel for short covering to support a more extended rally. Further fundamental support comes from reports indicating a 1.5% rise in coffee consumption over the previous year. Coffee is showing great strength on the charts with a steep and consistent rise since mid-October. It’s possible to see a pull-back in the near-future, but I would consider this a bullish opportunity as coffee futures have plenty of reason to see higher prices.
Coffee Dec '19 Daily Chart
The cattle market has been in a strong upward trend since the beginning of September and we could continue to see some more buying action in the short-term. This is due to the strong increase in the open interest, suggesting that fund traders are still active buyers in the market. The back-month contracts could start seeing some pressure since there is a huge premium on futures to the cash market, making producers consider increasing weights and higher production. We will see what the next Cattle on Feed report holds for us, but some are expecting a large number of placements for the month of October and even into November, boosting 2nd quarter production.
Cash traded cattle in Nebraska traded at $113-$115 while Texas and Kansas had $112 traded. December cattle will try to make a push through the $120 price level, which is a level of resistance, in the short term and if it does breakthrough, I believe $124 is reachable by the end of the month. If there is a failure to trade through the current resistance level then a 38% retracement would cause the market to fall back to $112, I believe if there is a pull back then it falls back to the $115 support level and trades sideways from there. Technically, the market is significantly overbought with an RSI reading of 81. The USDA estimated cattle slaughter came in at 119,000 head yesterday. This brings the total for the week so far to 234,000 head, up from 231,000 last week, but down from 243,000 a year ago. USDA boxed beef cutout values were up $1.81 at mid-session yesterday and closed $1.24 higher at $236.05. This was up from $230.55 the prior week and is the highest since August 27th.
U.S. dollar futures punched higher Friday morning, breaking psychological resistance at the 98 level. This week’s sharp move to the upside is no surprise considering the prospect for a phase one trade deal and new all-time highs in U.S. stock indices. To add fuel to the fire, U.S. interest rates are climbing higher, attracting foreign investment to the U.S. economy and helping to support the greenback. Expect resistance at 98.25, then again at 98.46. A close over that level could prompt buying back over the 99 level. Foreign currencies are selling off on dollar strength, specifically the euro and the pound. The chart set-up on the Japanese yen looks ugly, but I do believe there is value at these levels. This is a safe-haven currency, so it is selling off as sentiment improves. Commodity currencies, like the Canadian and Australian dollar, are relatively stronger. The Royal Bank of Australia did not cut rates at their meeting this week, which is helping to support the Aussie dollar. Technically speaking, the Dec AUD is forming a bull flag on the daily chart as the market takes a breath and is attempting to reverse the downtrend. I have a bullish bias on the Australian dollar so long as it remains above 68.25.
Markets are slightly lower this morning after another record breaking day in the U.S. stock market on Thursday. Markets rallied after a Chinese official said that the U.S. and China have discussed rolling back tariffs, reporters were told these could happen even before the first trade deal is signed. In October the two sides agreed to a preliminary deal. The Dow ended up 0.7%, 182 pts and the S&P 500 up.03%, both were new all-time closing highs. Priscilla Thiagamoorthy, an analyst at BMO stated “"For almost two years now, the US/China trade tussle has posed the biggest headwind to global growth. But with promising signs of progress on the trade front, a shift in global central banks to easing (including three consecutive rate cuts by the Fed this year), and mostly better-than-expected corporate profits, US stocks were pushed to all-time highs,"
Support is checking in today at 307300 and 305900 with resistance showing 309900 and 311200.