Senior Trader Daily Update 5 September 2017

Good morning everyone.
 
Gold gapped approximately USD 10.00 and AUD 7.00 higher on the open in Asia yesterday, as the markets had their first opportunity to react to the news that the Democratic People’s Republic of Korea (DPRK) had conducted its sixth (and largest to date) nuclear test, which had registered 6.3 on the Richter Scale amidst claims that the device detonated was a thermonuclear Hydrogen bomb.

Since gold bottomed out on July 20th after bargain hunting and short-covering commenced, its subsequent ascent to current levels has been driven predominantly by the geopolitical game of chess being played out. Regardless of whether investors perceive method in the madness of the US Administration’s foreign policy or just plain madness, the fact is that the precious metals complex in general and gold in particular have been the beneficiaries of investor nervousness.
 
With US markets closed on Monday for the Labor Day long weekend (which is generally perceived as the conclusion to the summer holiday period in the northern hemisphere) the markets trekked sideways after the initial surge on the opening in the Far East.
 
The mainstream media and the majority of the punditry will obviously focus on the actions of the DPRK and the rhetoric from the US Administration in response (especially as regards the likelihood of direct military conflict), however some analysts have espoused the view that events on the Korean peninsula are part of a more esoteric geopolitical / hegemonic strategy being carried out by the US to bring about pressure on China and to engage the US’s biggest economic competitor in a trade war via the ‘back door’. This line of thought carries some weight in light of comments made by President Trump’s former Chief Strategist, Steve Bannon to ‘The American Prospect’ on August 16th. Bannon was quoted saying, “We’re at economic war with China,” “It’s in all their literature. They’re not shy about saying what they’re doing. One of us is going to be a hegemon in 25 or 30 years and it’s gonna be them if we go down this path. On Korea, they’re just tapping us along. It’s just a sideshow.”
 
Additionally, from the same article, “Contrary to Trump’s threat of fire and fury, Bannon said: “There’s no military solution [to North Korea’s nuclear threats], forget it. Until somebody solves the part of the equation that shows me that ten million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you’re talking about, there’s no military solution here, they got us.” Bannon went on to describe his battle inside the administration to take a harder line on China trade, and not to fall into a trap of wishful thinking in which complaints against China’s trade practices now had to take a backseat to the hope that China, as honest broker, would help restrain Kim.
 
“To me,” Bannon said, “the economic war with China is everything. And we have to be maniacally focused on that. If we continue to lose it, we're five years away, I think, ten years at the most, of hitting an inflection point from which we'll never be able to recover.”
 
Pursing the path outlined above is not without significant risks. Overnight, China repudiated any US attempt to place it within a trade straightjacket over the North Korean crisis and Wikileaks’ Julian Assange suggested via Twitter that “90% of North Korea's trade is with China. If Trump blocks $650B of US trade with China he'll be deposed immediately.”
 
The latest CFTC Commitments of Traders Report (as at 29/08/2017) showed that gold and silver net speculative long length had swelled further. This does leave the downside exposed to speculative rebalancing on any mean-reversion or profit taking. However, given the present geopolitical climate, dips would likely be well supported as late to the party investors are given an opportunity to “get on board”.

Technically, XAU/AUD has advanced beyond favoured targets at the 1660/1665 area on the back of the most recent developments. Should gold clear resistance at AUD 1686.50 (the 76.4% Fibonacci retracement of the 1728 to 1552.50 move) however, then a move to the June 6th high at AUD 1728.00 which would complete a technical “rounding bottom” pattern (see chart), is highly probable.
    
XAU/USD since breaking out from its sideways trading band and beyond the technically important USD 1300.00 in early August, yesterday managed to advance marginally above the high registered in November last year at USD 1337.50 when the election of President Trump was confirmed. The region between the 22/09/16 high at USD 1344.00 as well as the psychological USD 1350 level (and option strike) presents as the nearest upside target / resistance zone. That being said, the recent net build-up in speculative long length and the potential for significant mean-reversion / speculative reweighting and the temptation for bullish investors to take profit, should be borne in mind.
 
Good luck and have a good week.
 
Regards,
Andre