Friday, October 12, 2012

Its a sideways story for now

When I wrote a few weeks back, we were hovering around 1770; right where we trade today. The clear supportive buying behind each dip indicated to me that we would likely get above 1800 and consolidate. While we came within an arm's length, we have yet to breach that level. Is this stall a pause for concern? I think not. In fact, it is probably healthy for the yellow metal to take a little breather here, before maintaining its journey higher.

As it became clear that we were consolidating and not shooting higher, I began to wonder what was in play. Interestingly, two of the technical guys I talk to said essentially the same thing.



Take a look at the above chart. It is a yearly of GLD (not Comex gold, but the chart is essentially the same). Notice all of the consolidation at the end of the chart. That has been the sideways movement gold has seen since my last writing. Consolidation like this is likely to become significant support or resistance going forward (depending on which was we move from here).

But pay attention to the formation of the chart starting in March through where that consolidation begins. You see the formation of a rounding bottom, or U, or as some would say, the cup part of a cup and handle formation (the handle being the recent consolidation). A break above this level would signal a continuation above the uptrend. But how do we know if we have stalled to the point that this upward trend becomes negated?

Those who follow Fibonnaci retracement theory will point out the key ratios of 38.2% and 61.8% as key technical levels of a retracement. So what does that mean?

The highs in March that you see on the above chart (if the chart doesn't show up just go to any major site and look for a 1 year chart on GLD) correspond to approximately 1780/oz in Comex gold. The all-time high in gold was made last September (not on this chart) at about 1920. So here are the key numbers; 1920, 1780, 1530. From 1920 to 1530 (the lows just below 150 that you can see on the chart above) is approximately 400 bucks. 61.8% of 400 is about 250. So a 61.8% retracement of the move from the highs to the lows would be about 250 dollars. 1530 (the low) + 250 gets you 1780, right where we stand and consolidate now.

The inverse of 61.8% (38.2%) should be considered when deciding if and when this up-move has stopped. So since this move off the bottom is about 250 bucks (1530-1780), a down move from the top of 38.2% should stand to negate the move. 38% of 250 is just under 100 dollars. That means that presumably gold could come off down just below 1700, and the long term up-move we are seeing would not be negated. As such, the small short term down moves are not of great concern to the gold bulls. We are a 70$+ move to the downside from even having to consider the long-term bearish implications of this slow down.

The important takeaway from this is that the range of the cup (formed by 1780 in March, down to 1530 and back up to 1780 again) should represent our upside target from the point of consolidation. In English; We retraced 250 dollars up to 1780. It we break above this level to the upside, we should expect to go about 250 dollars higher, giving us a target over 2000/oz.

What are the options telling us?

The truth

For weeks options have been getting cheaper and cheaper; and the wing options (lower premium options that people buy in expectation of big moves) have also been getting cheaper. At the money front month options are trading below 14% volatility. In simple terms, 16% volatility implies that gold would have a daily range (high to low) of about 1%, or approximately 18 bucks. We are seeing much tighter ranges, and thus the options pricing has been appropriate. While relative to recent memory these options look "cheap" they are telling of just how muted futures movement is.

Since options have been a pretty good indicator of the futures market of late, I would like to point their seemingly directional bias. In a vacuum, movement is what dictates options pricing. If we see a big move in either direction, options should get bid. However, we see times where this not the case. For instance, a few months back when gold rallied over 50 dollars on an employment report miss (biggest daily up move in years), volatility got offered (options got cheaper). There are no precise explanations for how these things behave, but keep in mind that options pricing is forward looking. A big move today does not imply a big move tomorrow. If for instance we have a big move that puts gold somewhere on the chart where we historically haven't seen movement, we might see options get cheap. The big move is good for people who are long options (long gamma more specifically), but it will not necessarily entice new options buyers to come to the market. Lately, on intra-day down moves, we have not seen options get bid. This indicates to me that market participants do not believe that a temporary down move implies continued moves to the downside (or rapid snap-backs to the upside). Gold options have tended to get more bid as we move up, which could be considered bullish as options traders are betting that significant movement is more likely to occur as we move higher. All that being said, with QE behind us, short term catalysts for dramatic moves are rather few. For now, the sideways story continues.

Have a great fall football weekend,

Ben

Monday, September 17, 2012

Gold continues to push higher; Why the party doesn't stop

When I last wrote a few weeks back, I pointed out that it was not too late to buy gold, despite the tremendous run-up that we had seen. Trading approximately 1770 an ounce, 80 dollars higher than when I made that suggestion, I continue to believe that it is not too late. The gold trade is now entering a new phase, but the macro headwinds should continue to be supportive.

I believe that one of the most difficult concepts to grasp for those not following the gold market regularly is that what dictates gold's performance is often in flux. Over the course of the last year, some people gave up on gold as an investment completely because it sold off in the wake of a very scary macro environment. The so called "fear trade" stopped working. It became clear that people would rather flock to US treasuries than gold as a safe haven. In retrospect, it makes some sense, because the main fear underlying the macro environment was based around the Euro. There is however a flaw in the logic of too many commentators who have argued that gold is dead because it does not react in a clear manner to the amount of perceived fear of global economic disaster. The reality is, that as the Euro has rallied, so too has gold. In the ultimate world economic collapse scenario, most everyone agrees that Europe plunges first, sending contagion throughout the world. Thus, were gold to perform based on the degree of fear in the markets, we should expect for it to trade with inverse correlation to the Euro. It has been the opposite. As gold has rebounded nearly 250 dollars per ounce from its lows just a few months ago, the Euro has only gotten stronger. The EUR/USD Cross which seemingly every currency trader was short below 1.25 is now sitting comfortably at 131.5.

So understanding that gold is not simply a fear indicator, what is it that has led the rally of the past few months? Naturally it is a combination of things. Technically, its breakout above 1630 (the top of the summers range) was supportive. Then came all the QE talk, and then, last week came QE. If the story ended there, then I would agree that maybe the gold up-move has run its course. But there are too many factors that remain supportive to gold, even without QE expectations to help push it higher.

Last week, as expected the Supreme Court in Germany upheld the legality of Germany's participation in the EU bailout funds. This will mean more money printing, which should, overtime, be supportive to the prices of hard assets such as gold. Somewhat paradoxically, such money printing should devalue the Euro, which given the recent trend (in Euro/Gold correlation), should be bearish for gold. However, bailout money and printing have served to make the Euro stronger. The reason as I see it, is that the Euro trade is and has been less about the relative amount of money being printed as it is the perception about the Euro's very existence going forward. While printing money dilutes the value of money already in circulation (and thus should devalue the currency), it increases the likelihood of keeping the European Monetary Union in tact. That has been the focus of the trade, and until that changes, such accommodation should remain supportive for gold.

I believe we are now entering the phase where the driver of gold prices over the next few weeks may be the degree to which violence persists in the Middle East. Months back, I wrote about how my friend had pointed out some articles on debka.com/ highlighting how much turmoil was present in the Middle East despite very limited American media attention. Sadly, it has taken murderous attacks and continued threats to our embassies overseas to get our news cameras to start rolling tape. Following the 2011 overthrow of Egyptian President Hosni Mubarak in February 2011, gold rallied steadily until it flew to make its highs just over 6 months later. Gold will tend to perform with other physical assets, and unfortunately, tensions in the Middle East seem a ways off from peaking. With oil sure to catch a bid with heightening tension, gold is also likely to come along for the ride. Given the speed with which gold prices have moved up in the last five weeks, a minor short term correction would be perfectly normal and healthy. With that being said, the macro environment continues to be supportive for gold, and I expect I will soon be writing about gold breaking and holding above 1800/oz.

Friday, August 31, 2012

Jackson Hole gives gold a jolt..50 dollar bounce off the lows

All eyes this week were on Jackson Hole, awaiting the words of Ben Bernanke. While the usual overblown expectations of an announcement of QE3 were in place, the markets would still likely find satisfaction in the assertion that accomodative policy might be implemented sometime in the near future. There was no announcement of QE3, but Bernanke's words did indeed leave the door open for more use of Fed policy.

As you may recall, the last release of the Fed minutes help juice the markets as Fed governors sounded a far more accomodative tone in the meeting. The head scratcher was that the next morning, Chicago Fed Governor Charles Evans came on CNBC and seemed to downplay the euphoria. The Fed minutes are released weeks after the meeting takes place, and as such, there is always the potential that a shift in data post-meeting would make the minutes themselves a bit misleading. Between the time of the meeting and Mr. Evans' interview, there had been positive economic data releases, which in all likelihood would hurt the case for more easing. So hearing Evans' more reserved tone post-minutes release, created some skepticism in the market. Today however, those same dovish sentiments were reitterated, keeping markets happy.....but it didn't look like that at first glance.

The markets first reaction was to sell off. Gold, which was trading near 1660 pre release, dropped 15 dollars in a matter of minutes. I immediately became confused. As I listened to the reading of Bernanke's speech, it seemed that everything I was hearing was bullish for gold. While I understood that QE was not announced, the dovish tone should have sent gold higher. Give it a few minutes, and that is exactly what happened. Gold reversed off of its low of 45.1 and as I write is trading nearly 50 dollars higher! So what happened?

Bob Pisani gave an explanation that is just so telling of the way markets work today. He explained that there are algorithms that look through documents perusing for buzz words that likely tell the gist of the document. In this case, it seems that those algos correctly saw that there was no QE3, but were unable to account for the general accomadative tone of the letter. So, as people began to hear what I was hearing, and process it, bids came back and the market reversed. This is a classic example of the distortions that can happen in the marketplace when computers act in place of humans. Gold ripped up, recapturing 25 dollars to the upside to about 1670-72, following the human "intervention", before beginning a steady climb to the day's highs.

There is one thing I want to hone in on as to why today's rally only adds to my bullishness. Before the Bernanke release gold was hovering around 1660 and the Euro/USD was trading above 1.26. As I have mentioned in these writings, the trend seems to be that gold tracks the Euro. Macro thoughts aside, it makes sense that gold would track Eur/USD, because a stronger Euro/Dollar cross, means a weaker dollar, which means for gold to maintain equivalent value in dollars, its price must go higher. But here we sit, trading 35 dollars higher in gold and where is the Euro? Lower. To me this means that gold is performing well independently of the currency in which it is priced. I received confirmation on this notion when Dennis Gartman came on TV and said that gold was indeed accelerating in all currency terms.

For those who read this blog with less interest in all of my musings about what is happening and what it might mean, and more interest in "is it too late to get back in" I would say this. It is not too late to get back in. If you believe that gold is a good investment, then the fact that it is about 10% off of the lows should not be discouraging you to buy. The "I want to wait for a pullback" argument is overdone. if there is to be a pullback, there should be significant support down to the 1630 level, 60 dollars lower than here. That is less than 4%. With the way we are seeing real and sustained buying in this market, I would argue your chance of missing that pullback is high. Don't be a penny pincher. If you believe in the gold story, recognize that as it goes up, the bullish outlook only becomes greater. It is not too late to get back in.


Have a great and safe Labor Day weekend

Ben

Wednesday, August 22, 2012

Gold is starting to shine; Fed Minutes and The Middle East

What looked like it would be a quiet day changed shortly after the options market close. Sitting inside a late-August like 7 dollar range throughout the day, we awaited Fed minutes release at 2pm. To my surprise, the minutes showed that Fed governors emphasized the potential for use of monetary stimulus in the coming months. Gold rallied on the release, and is now trading comfortably around 1650, where, it hung out for months before dipping into the 1530-1630 range that we broke out of on Monday.This seems to me to mark a material shift, and while I am not sure why it is taking place, it is important that we take note.
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Fed Minutes

The thesis I have put forth for many months on this site has been that the likelihood of monetary stimulus from the fed is actually quite low. This thesis proved to be correct despite the big Goldman Sachs call that we would be getting QE in July. The basis for assuming no QE is and has been rather simple.

The first reason is that there is a great deal of debate as to whether or not QE is actually stimulative for the economy. If the evidence does not clearly support it, what would catalyze the fed to move in that way?

The second reason for the no- QE thesis was centered around the idea that the Fed is aware of its dwindled stash of monetary bullets, and thus, would only act to use what little it has left if the economic situation worsened significantly. We can debate the data all we want, but things have not materially worsened, and we have watched the stock market quietly creep to multi-year highs. Why then, with markets holding their own, would the Fed ever choose to act?

I should be clear that to this point, the Fed still has not acted or engaged in any new stimulus; but the last meeting's minutes clearly indicate a signaled increase in the likelihood of such stimulus. In the hour or so that I've had to think about it, the only possible explanation I could come up with for this change in sentiment is that the Fed governors realized that the stock market is coming into some real resistance at these levels, and that they want to keep the uptrend going. Bernanke has often said he views stock market performance as important to the recovery; but whether or not the Fed would go as far as to try to create a catalyst for a technical breakout I do not know (it seems like a bit of a stretch). I should point out that the minutes are from a meeting that took place weeks back, so some of the sentiments of Fed members may have been more accommodative with the stock market at lower levels.
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The Middle East

A few weeks back, I mentioned both my discontent and disbelief at the lack of media coverage being dedicated to the tensions in the Middle East. As the Syrian debacle heated up and Saudi troops were being mobilized, all I could hear on the TV set was hackneyed chatter about the next big thing coming out of Apple. What perplexed me about the lack of coverage was the fact that the events of the Arab spring in the previous year were so closely covered, and such important drivers of the market at the time. I felt, and continue to feel that were this coverage to pick up, gold prices would be a beneficiary. Now, we are finally starting to see that media coverage pick up.

CNBC had a number of segments today centered around the topic of the Middle East, in particular whether or not Israel will choose to strike against Iran. Having recently been to Israel, I have a new found appreciation for the unthinkable complexity of the issues behind Middle East tensions. Middle Easterners do not think about nationhood the way Westerners do. Colonialism led to the drawing of borders that had little to no regard for the cultural boundaries amid the geography. As such, it is increasingly hard for someone who is not from the Middle East to recognize the impact of cultural affiliations on a more tribal, or, put less eloquently, "non-nation sub cultural" level. Therefore, I will not try. But I want to highlight a few comments made by some of the guests with respect to the potential for Israel to strike Iran.

The first commentator I heard pointed out that there is rampant inflation and economic woe throughout Iran. He suggested that the likelihood of Israel attacking Iran imminently is very low, because starting a war would simply play into the hands of the Iranian government by giving them a way to unite their people. By his logic, not striking would allow for the continued build of frustration among Iran's populace (due to the economic situation, which can in part be linked back to the government's foreign policy which has led to sanctions) and thus a weakening of support for its government.

Later in the day, a different guest stated that he thought an attack from Israel was highly probable. He reasoned that top Israeli officials believe that were they to engage in war, they would want to do so before the November elections. The logic, as I took it, was that Obama would have no choice politically but to stand behind Israel with the election forthcoming.

Whatever the outcome, there is no surer truth than the fact that there are no quick and easy solutions in the Middle East. The issues and tensions have been quite serious for some time now. The game-changer is that we are starting to see the media hone in on it. If media coverage continues, which I think it will, such tension should be supportive for gold prices.
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In conclusion, it is becoming harder and harder to see gold moving significantly to the downside. We have broken out above the 1530-1630 range I always mention, and because we were stuck in that range for so long, the breakout becomes all the more meaningful. I would not get ultra-bullish on gold here in the immediate short term, simply for the simple fact that we spent so much time hovering around this 1650 price earlier this year. That consolidation that we saw will make it technically harder to soar higher.... it will probably have to do a little bit of work. That being said, the aforementioned Middle East situation should keep a bid in gold. In my last post I mentioned the importance of the upcoming German ruling on the constitutionality of the Euro bailout funds. In passing Merkel has been supportive of Draghi of late, which is likely part of why market handicappers seem to be betting that the fund's legality will be upheld (Yes, there theoretically should be no connection between an executive's thoughts and a ruling by a court.... but we all know how it really works). Gold continues to trade (lately even more) in step with the Euro. So any more news that is pro-Euro existence, should be supportive for gold prices. Perhaps, as with the stock market, gold will take a little breather, but given both the technical picture and the headwinds surrounding it, gold looks poised to continue moving higher.

Thursday, August 16, 2012

John Corzine, above the law... and gold

Before getting to Corzine, lets look at gold.

Last I wrote, I had commented on the possibility that we might finally break out of the 1530-1630 range that we have been stuck in for months. I had written at a time where we saw a high at the very peak of the range (about 1632), but we then sold off. Still, we managed to make it back to 1628....but again, sold back off, dipping below 1600 earlier this week. We do however sit here now, trading approximately 1620, seeming like the yellow metal wants to test the top of that range again (much the way it repeatedly touched the bottom of the range on the downside). So what will make it move?

John Paulson, whose gold fund has been an utter disaster, and George Soros have both shown in Q2 filings that they are buyers of GLD. They are however buyers of a commodity that has seemed to have no catalyst for the longest of times. While talks of QE3 can fill up the airwaves and help fill our ears during these slow market days, it has all gotten just a little bit old. The real catalyst for movement will likely come down to September 12th. 

SEPTEMBER 12th: Mark your calendars.

It is September 12th that the German Constitutional Court will decide on the constitutionality of the creation of a permanent EU bailout fund. Unlike the "European Summits" which have become code word for "meetings in which European leaders will feign unity to keep their cost of funding lower", this is a court ruling. While I am not familiar with the German court system, I would venture to say that the likelihood of our first concrete indication into Europe's future is far more likely to come on September 12th than at the next Euro Summit.

Handicapping the market reactions to such an event is actually incredibly difficult. In theory, approval for a permanent bailout mechanism should stand to mean more money printing is on the horizon, which should devalue the Euro. But, on the other hand, approval of the bailout fund also means that the Euro's chances of surviving increase drastically, which should enable it to catch a bid. I believe that the perceived future of the Euro currency will have a far greater impact than any "money printing" implications. As gold has tended to trade more or less in line with the Euro, it stands to reason that an upholding of the legality of a permanent stability mechanism would actually be good for gold. That is of course, for the short term. Were pandemonium to be unleashed in Europe... bank runs etc... there could be a mass exodus to physical assets, chiefly gold. Still, the likely first move in gold, were the fund to be deemed unconstitutional, would be to the downside.
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Now to Corzine; The New York Times reported this morning that he will not be facing criminal prosecution. It is such an outrage for any human being with a pair of eyes, ears, and a quarter of a brain to accept (without sounding too self absorbed, I do put myself in that category), that I would not even know where to begin writing about it. Zerohedge, as it usually does, has provided a better outlook than I probably could. 

http://www.zerohedge.com/news/jon-corzine-will-not-only-not-face-prosectuion-may-be-launching-hedge-fund-imminently


We should not need any personal anecdotes to bring forth the absurdity of this lack of criminal prosecution; but here are a few. As I walked onto the floor every morning during the debacle, I had to hear the stories of honest people who had been in the business for years living in fear about their financial futures. Not just because of potential money lost, but the inability to even trade out of their positions. Options positions can go bad...very bad... in a very short period of time. Part of the reason that you rarely see active traders with positions taking vacations here (at the Nymex in New York) is that positions need to be monitored so closely. It is not like stock or futures trading where you can leave your stops in and leave. As such, these traders were not only exposed to cash losses, but also tremendous risk from being rendered paralyzed with respect to their ability to trade out of their own positions.

How is it that Raj Rajaratnam gets 11 years for taking insider tips, without causing anywhere near the loss/harm to individual traders and investors that Corzine did, and Corzine does not even get prosecuted? Even when something as absurd and criminal (the lack of prosecution is a crime in itself) as this takes place, I try to see both sides. On this one though, I simply can't find how (aside from political contributions and the heavily entrenched old boys club) one could "publicly" justify this lack of action. If you haven't read the zerohedge piece; read it. Hubris has reached all time highs.

Monday, August 6, 2012

The Dog Days of August

In my last writing, over a week ago, I discussed the new found life of call options that had been left for dead during the time that the only outlook for gold seemed to be to the downside. Gold has been bound by an approximately100 dollar range for months (1530-1630). I wrote in my previous post that while there was certainly more bullish sentiment on gold, that the range-bound story would hold until we broke at least above 1635..... We never did. We stalled around 1632 last week, and have yet to push through. While we are now consolidating on the high end of the range, there is little hope for a breakout in the near term.

There is plenty of back and forth (as there should be) about the validity of the jobs report. Whatever the reality however, the perception was that Friday's report was not so bad. Gold struggled on the news, as the pattern (from the last 2 reports) seems to be that a good jobs report means a sell off for gold (and vice versa). But the way in which it took place, served as what I believe to be the nail in the coffin for any excitement in the gold market in the coming weeks. Front month gold option volatility got crushed, plummeting nearly 2% on the day. Today, that volatility came in even more.

As we stand, we are still in the midst of the 100 dollar range, and we now enter the historically slow month of August. Despite what could have been a very momentous market week last week (given the jobs report/ Draghi commentary etc) we moved very little. A seasonally slow month coupled with limited data forthcoming equals a slow August to my mind.

I do see gold having a positive bias to the upside, but I think it is limited. Even if we are to break 1630-1640, we run into 1650 area, where gold had shown significant consolidation before dipping into the aforementioned range. Hopefully some news comes to jolt the market, but for now, we can look forward to a rather uneventful August.


Thursday, July 26, 2012

A reason for hope for the gold bulls (settle 1615.1, August Expiration)

It has been a while since I have written, and frankly it is because I felt that the last week had very little of consequence to write about. The daily reports I read about gold had essentially admitted that they too had very little to say. The last few days however, have changed all that. Gold is starting to get a bit of its luster back.

Gold has been range bound for months. While it has played both sides of the range, Everyone feared the downside far more than the upside. Having tested multi-year lows around 1525 multiple times, a break below 1525 would almost certainly mean an extension of selling. Each time gold tested that low, strong buying came in to support it. While gold longs could take comfort in the strong buying, the nervousness of what would happen IF gold were to break was only exacerbated. If a serious support level is broken, then it becomes major resistance. As such, gold's inability to follow through on the upside and put together any sustained rallies kept concerns about a gold collapse high. But something has materially changed. You need look no further than the gold options market to see that.

The price of puts relative to calls (put skew) has been high for weeks. Volatility only seemed to perform when gold moved down. There is no greater example of that then the day of the poor jobs report that Gold rallied more than it had in years (50+ dollars) and gold options were offered. This implies that gold players don't view a dramatic up move as indicative that movement will continue (When there is a lot of movement/volatility, options go up in value. The fact that the price of options did not go up as gold had a drastic move, shows the directional bias of the market. When we would sell off even twenty dollars however, options (puts particularly) would be bid to the moon). ..... But that changed this week.

As we began to rally, we started to see call options get bid. As I said to a friend, I had forgotten that calls could get bid it had been so long. Not only did skew go out (calls get bid relative to puts) but volatility moved. I can (and often poorly of late) speculate as to gold's direction based on technicals and hearsay; but the options are telling us something important. That being said, I still think we need to trade through 1635 (a break out of the range) to become bullish long term. The other important thing is to see that gold not become so correlated with the Euro. They have traded tightly of late. While a Mario Draghi comment that really adds nothing excited the market and the Euro today (short cover rally in the Euro because everyone is short) might have helped give gold a jolt, the long term gold bull story is based on the collapse of fiat currency, not its stability. If we can break through and hold just 30 dollars higher (approx 2%) and we start to see a breakdown in Euro/Gold correlation, then we will know that the gold bull is back to stay.

Tuesday, July 17, 2012

So QE3 is coming?

Last week, BTIG's Dan Greenhaus pointed out on air that the Fed minutes were more dovish than the market had interpreted. He posited that following the market's unenthusiastic reaction to the Fed minutes, his team did some deeper reading, and found that there was more pro-stimulus sentiment among Fed governors than met the eye. Today Bernanke spoke, and the market reaction was rather interesting. Initially markets, led by gold (equities followed) sold off. Then, as Bernanke began to acknowledge just how difficult market conditions are, markets found their way back. As I write, the S&P, which had gone negative about 6 handles, is now up 10. So perhaps the market is starting to see what Greenhaus saw last week. It may seem crazy, but that is how this market works. The worse the perceived economic news, the better for markets, because the more bad news, the greater the likelihood that QE3 will be initiated.

Be very careful to take the market's short term delight with a strong grain of salt.

If you watched his testimony today, it becomes quite clear that the Fed has not made up its mind as of yet as to whether or not it will act. Bernanke had some very intriguing Q&A, particularly with the likes of Bob Corker and Chuck Schumer. Schumer told Bernanke not to expect anything to get done in congress, and thus, to get to work on his own. Corker questioned Bernanke as to why he was not more critical of congress, and did not stand up to them more. All else aside, it became clear that congresspeople have accepted their own ineptitude. Bernanke did however say explicitly that were sufficient action to be taken by congress to help bolster the economy, the Fed would be less likely to come to action.

We have, for good reason, become very skeptical of anyone we see with a microphone who sits in front of congress. Bernanke however, has been pretty consistent and straightforward (regardless of what you think about the job he has done or the job he has). I think it is entirely possible, and even likely, that the Fed has not made up its mind. He made it clear today that policy action is possible in the future, but he never denied that in the past. Its a lot about nothing, especially considering there is limited evidence that QE3 will actually do anything to boost the economy. More liquidity does not mean more economic activity.

Fortunately bank earnings have given the stock market a real reason to be happy. But complacency is simply too high in this market. The mere fact that the bad news = good news scenario is how market participants are thinking tells us that we are in denial. Those who watched the Warren Buffet interview last week heard his pessimism, as he blatantly stated that things have gotten materially worse in the last 6 weeks in the Europe. He was also not as "gung-ho Go America!" as he usually is. Buffet has probably been the economy's best cheerleader since the crisis began in '08. To ignore his shift in tone (all we do is listen when its positive) simply highlights collective investor denial. Europe somehow manages to keep muddling through, but it is past the point of return. The bid for the dollar will remain in this market as the inevitable doom sets in over Europe,  sending equities lower. This market is simply too complacent, trading at 1357 (S&P) right now. Let's take a look back in a month, I think we'll be lower.

Wednesday, July 11, 2012

Pending Fed Minutes

The markets seem to be nothing but disappointed recently with Fed announcements and minutes. The pundits seem to talk about the disappointment that we don't get QE. So, might we see "hints" in the language?

If you want to take a punt (with gold) I would suggest the long side. There are a few reasons

1) While I still don't understand why the Fed would do QE with the stock market where it is, if they are to do it, they might provide hints that it will come soon. The Fed does not want to appear to be political, and waiting to do QE....say close to November, might be seen as collusion between a supposedly "independent" Fed and the Obama administration. I don't think they will instate QE, but in the minutes, they might make it clear that there is a possibility to do it at the next Fed meeting, assuming things get worse.

2) My friend, who was watching the bonds, pointed out that the 10 year yield dropped 5 basis points in 1 print about an hour ago (this means they were buying hte bonds). Quantitative easing, or the buying of bonds/financial assets further out on the curve, is bullish for bonds (moving yields lower). This unusual action could be indicative of something to come soon.

3) Yesterday, when gold gave up all of its gains and then some, the metal held, and rallied back to settlement. We sit now down only 3 dollars from yesterdays settle (we had been as many as 15 dollars lower). If a market manipulator was trying to smash gold, they would've likely used the momentum on the down move to stop out all of the longs.

 If I were to try to hedge myself, I couldn't pick a worse time. The market reaction to these numbers are about as unpredictable as it gets, but if there is to be an extreme move in either direction, up is more likely.

-Ben

Friday, July 6, 2012

Another disappointing jobs number-brief analysis

Before getting into the jobs number, lets take a quick look at gold. As someone who spends a significant portion of his life watching the gold futures ladder, I must say, my life is rather boring. To be fair, on a day to day basis, we have seen some pretty significant moves. One day we will be up 30 bucks, the next down the same. Last jobs report we moved over fifty dollars. Today, gold spiked 10 dollars after the disappointing jobs report was released, only to give back the gains. It is as if there is a rule that come Friday, no matter what has transpired during the week, gold needs to settle somewhere near 1590.

Turning to the employment report. A somewhat disappointing 80,000 non-farm jobs were added in the month of June. The unemployment rate remains consistent at  8.2%, while average hourly earnings ticked up, as did average hours worked per week (from 34.4 to 34.5). A mere tenth of an hour (or 6 minutes for those who don't like to do decimals of hours) probably does not seem like much, but we should at least consider its meaning. If there are approximately 100 million people in the workforce, and the number of hours worked by already-employed people increases by approximately .3% (.1/34.5) then effectively 300,000 or so jobs become unneeded. To do the simple math, .3% of 100 million is 300,000, could you imagine if you just took the time in hours added per work-week and turned them into jobs?

Yes it is true, the world does not work like that. If adding to the workload of existing workers instead of hiring is the choice of employers, than things will be better for a few, but worse for many. I do not want to try to draw too many conclusions from these reports, but I think it is important to focus on hours worked far more than we tend to.

All the best,

Ben


Wednesday, June 27, 2012

Why we now know when its market manipulation and when its real; settle 1578.4

13,000 contracts. That is approximately how many contracts were bought circa 10 am this morning. Gold, which was down about 10 bucks on the day at the time, rallied up from 1566 to make the day's high of 1584.6. It was clear that there was a big buyer, because it happened at a time where no news or major economic data was being released. Other markets did relatively little during the move.

While my call has been that we will hold near these levels and go higher, the price action did not make me anymore bullish. Whether the buyer was short covering or initiating I do not know; but the price action following the buying was disappointing. New buying did not come to the market, as the high was made in an abrupt fashion, and never did we see the day's high retested. In fact, we had trouble even getting back above 1580. Gold never did return to the 1566 level where the buying began, but the lack of follow through was a bit disappointing. 

To put 13,000 contracts in context; we have only traded 111,000 contracts since the open last night. So over 10% of the days volume was traded in a 10-15 minute period which, as mentioned, did not hold any significance. So while the 18 dollar move low to high might seem like a lot, I do not find it to be particularly impressive. On major economic announcements, I have seen orders between six and seven thousand lots cause equal price movement in a matter of seconds. I must admit however, that those fast moves, have all been to the downside. Still, I think today's buying provides an interesting point of reference for understanding how gold trades... and how those other moves are almost certainly a sign of manipulation of price.

Whether short covering or initiating, this was either real purchasing of contracts, or manipulation by someone who had no clue what they were doing (hence the failure in pushing the price drastically). The big difference between this rally and the precipitous drops discussed in previous posts, is that this took place over time. The market was able to absorb 10+% of a day's volume when things were otherwise quiet BECAUSE the buying was spaced out over time. The precipitous drops have all taken place instantly. The 7,000 contracts or so that trade on the drops (I've seen it twice) all trade almost at once. For reference, 7,000 contracts at 1600 carry a total notional value of approximately 1.1 billion dollars. For that kind of notional value in a single trade, you might assume that someone has at least a faint clue as to what they are doing. Either that whale is blown away by the fact that you can do two times as many contracts and get better price levels, or the case for the fact that those sellers WANT to drive the price down becomes all the more strong.

For anyone who has paid close attention to those vast sell-offs I might expect to hear a counter-argument raised. Those sell-offs have come at the times of major economic news. One could argue that at the announcement of major economic news, a bullish or bearish thesis could change on a dime, and there would be panic to get out as quickly as possible.
 Two comments to that argument.

A) You would still be better off to spread the order out over a 1 to 2 minute period
B) Pay attention to when the sell-off (or rally, were it to ever work that way) happens on the mini flash crashes. The sell-off happens before the news is actually out. So in essence, everyone is fooled into thinking the sell off is drastic BECAUSE OF the news that is released. Au Contraire. The moments before news is released is when everyone gets flat and pulls their orders. Hence, the easiest time to rip through a market with the least amount of size.

I have made these arguments before about the way the manipulators smash gold and why they do it when they do it. Today's example of big buying (2x the size) not moving the markets nearly as much (particularly when accounting for order size and relative daily volumes) only bolsters the argument that the flash sell offs are pure market manipulation.

Thursday, June 21, 2012

Everything happened the way we would expect.... a day late

As we watched gold, silver, and everything but the dollar, bonds, and nat gas plunge today, one had to wonder; Why didn't this happen yesterday? Sure the market jerked around a bit following the announcement of no QE, but overall the market's reaction was rather tepid. Settling 1615 yesterday, we settled approximately 50 dollars lower today. To be fair, gold was nearly 10 dollars lower after yesterday's settlements came out, but either way you slice it, today was rough. So where shall we go from here?

After the close I was talking with a friend who trades silver options. He asked me what I thought (silver got pummeled, down over $1.5 today) and I told him I didn't think the selling (in gold) would last long. My reason? We have seen gold hold near the 1530 levels the last 3 times it has tested, each time with strong buying coming in to aid the market. The lowest we got since the last time we reached the 1530 area was 1557, which we hit in the overnight session. Trading in the mid 60s now, with all the support we have seen, the risk/reward seems far more favorable to the upside. I would not be surprised to see us go back and test the 30 level, but the perception surrounding gold (which I believe has generally gotten more positive among investors) would have to be worse for us to see a breakdown below such strong support.

Despite my conviction about these support levels being the real deal, I think the comment my friend made to me about silver puts is more telling. He pointed out that each time we have gone down to these levels previously, he has been unable to buy downside puts without paying up big. Today, he said, he had no problem getting equivalent puts. Silver is not gold granted, but it was not as if the puts in gold were completely untouchable either.. (December 1300 puts went cheap about 500 x, though they went on the screen in 2 seconds... not a whole lot of time to react). I think it is important to be careful not to assume too much about direction from the options market. But when you see the skew not performing as one might expect on an extreme move (particularly near a low or high) I think it is noteworthy. I have pointed out a number of times that the day before gold made its highs last September you started to see the calls (while we were up) getting offered. There are people in the know who trade these option markets, and they are thinly traded enough that the big players with "inside knowledge" might not be bidding puts up as usual for a reason. Gold and silver don't need QE to go up, and to use the "no QE" as the reason we will capitulate would to my mind, be a mistake. Meaty delta calls in the front months in Gold (July and August; July expiring next week) are actually trading at lower volatility levels than the at the moneys.... something we have not seen for some time. Expect that relationship to end soon, particularly with anything but a breakdown.

Wednesday, June 20, 2012

Quick Pre-Fed Announcement Run down

We are currently hovering around the 1600 level, over 20 dollars below yesterday's settle. It is a bit confusing to me that I keep hearing that the consensus is that QE WILL be announced, yet most people I talk to seem to think that it won't. I wrote last Friday that barring a disaster in Greece, I would not expect to see QE today. Since Greek elections went well from a market perspective, I continue to think we will not see QE.

I have proposed that the Fed will wait for worse times to do QE if they are to do it at all. But there is an even simpler reason to think that it won't happen. Bernanke does not want to surprise people. That's not the game he's in. Bernanke's generally calm and professorial disposition is important for the post he holds. When markets are easily spooked, it generates volatility, which tends to limit the degree to which people feel comfortable taking risk. Having not given hints for the possibility of QE (even though the market expected him too), Bernanke would be in essence telling people that he was capable of surprising them at any time. To do that, would ruin his ability to serve as a calming agent for markets. I do not know about whether operation twist will be extended, but QE to my mind is an extremely unlikely. Big announcements like this usually provide the opportunity for the manipulators to smash the gold market right before the announcement when liquidity dries up. That is what I anticipate as the likely move. If, however, it gaps up (regardless of what the announcement is) expect gold to break out above 1635, which has been resistance of late.


Sunday, June 17, 2012

Are the algos painting the tape to create more volatility?

As it looks like the Greek elections will keep unrest and panic at the way side at least temporarily, gold seems unsure about what to do with itself. Opening at 1630 (just above settle from Friday), only to drop to a low of 1606.9. With a high of 1631.3, we have just under a 25 dollar range.... and its only 9pm on Sunday. I was told it was a quick drop and snap-back. We are becoming more accustomed to these moves where we see rapid drops and then buybacks. It seems to me that these snap-back moves after fast and precipitous drops all take place at night. When the quick drops happen during the day, you rarely see the snap-back so fast. I don't think this is co-incidence.

Gold is not having an identity crisis. A wide range for early Sunday night is not indicative of the market's ambivalence as to whether or not gold is a safe haven asset. What is good for fiat currency should be bad for gold, until it can be substituted for it one day. With the conservatives getting the nod in Greece, for the moment, the Euro is safe. While it is true that a strong Euro (and relatively weaker dollar) is supportive in real dollar terms for gold, what is good for fiat currency is generally bearish for gold. But the obvious market manipulation we are seeing before our eyes tells far more than any macro trend in day to day gold trading.

How do the futures algos work and make money? I wish I knew. I do know that many have tried and failed at that game, but I don't know what it is that makes the winners win. What we can see however is that algos benefit from market volatility. If an algo benefits from more market volatility, why not paint the tape and show a wider range.... adding to the "uncertainty" of what this quandary we call gold is really all about. That should almost certainly ensure even more wide ranges during tomorrows trading. When there is movement, however they do it, the algos win. So I ask, if there is almost no volume around this time of night before London opens, why a quick sell off and snap back? Simple. Someone who wants to paint the tape does so when its cheapest, during times of low volume. On low volume, you can easily push the price both ways. Sell it down on relatively light volume, buy it back on relatively light volume, risk far less than you will benefit from a more volatile market the next day. So tomorrow, when the "is it a safe haven?" commentary hits the news wires, remember, they are playing directly into the hands of algo operators. If people don't understand this stupid commodity, well then ascribing a "fair value" should be all the more difficult. The more price movement, the more the algorithms can profit, the more stops they can try to run, and the more volatile gold gets. Let's be smarter than the mainstream media. It is the players in the market and the way they operate; not "the global picture" that really dictates the way gold trades.


Friday, June 15, 2012

No small weekend ahead- settle approx 1628.1

Greece Greece Greece. The Greek election is this weekend. Unlike the elections we are used to, there is no guaranteed definitive outcome. In fact, from those I have spoken with, it sounds like a non-majority/ non result is the most likely scenario. The one scenario that would likely spook the markets most would be a victory for the Syriza party, which has openly stated they will not cooperate with austerity measures.


While it seems sensible to consider the political implications of the results for Europe's future when trading, I would emphasize the importance of the reaction of the Greek people. Over the past few years I have noticed that markets have a tendency to become increasingly volatile when violence in Greece is shown on TV. You won't find fundamental or technical analysts talking about it, but if the elections lead to violence, and that hits our TV screens, it might well accentuate whatever moves we are seeing. If chaos is to really set in, then accelerated bank runs become a near inevitability. If this scenario plays out, markets would likely take a nose dive. 

What happens this weekend may have implications for the Fed language that we hear later in the week. As readers will remember, we have been looking ahead to this coming weekend and week for some time now. Many, including Goldman (which has been calling it for months) think that the Fed will announce QE3 this week. If the elections lead to a poor market reaction, the likelihood of QE3 increases significantly. Barring a strong sell off on Monday due to a Greek fallout, I believe that people are over estimating the likelihood QE3. As I have said here before, the Fed has a smaller toolbox than it once did. Unless we see a new yearly low in the stock market (over 60 S&P handles lower), I think they will keep what little they have left in the way of policy stashed away for a rainy day.

Gold has become incredibly difficult to handicap of late. As those who have read my blog before know, I abhor financial journalists' unwillingness to take a stand on the topics they report on. As just mentioned, I will take what I believe to be the unpopular view at this point and say that we will not see QE3 this week. However, I simply can't take a directional view on gold. We have seen swaths of divergence between equities and gold in the last couple weeks, but there has not been any consistency to that divergence. The support we have seen hold in the mid 1500s has shown that there is strong demand for buying the dips. However, trading 100 dollars higher than the recent lows of 1527, there is a lot of room to the downside. If you are buying for your portfolio however, just buy it and forget about it for a while. The money printing going on in the world will not stop, and nor will the deterioration of faith in fiat currency.

Options Commentary

In the options world, we are running front month volatility (expiring in 8 trading days) at 20% (a month further out approximately 21%). While vol was out earlier today, we saw gold volatility get hit hard in the last hour (1 pm eastern now). Implied volatility has been higher than realized vol, but I think that is justified. With a front month break even at just over 20 dollars, you are losing on erosion most days. But bare in mind that we moved 60+ dollars on the Friday we received the bad jobs data. With the events forthcoming, I think it makes sense to remain long vol. The events (Fed announcements/ the elections, which have big implications for the currency markets) tend to make the gold markets move big.


I'm off to Mohegan Sun with some friends to play poker this evening. I hope everyone has a great weekend ahead of what is sure to be an exciting upcoming market week.  Please post comments on thoughts you have, questions or ideas about what is going on in the market, or thoughts on what I can do to make the blog better.

All the best,

Ben

Friday, June 8, 2012

A lot about nothing? Settle 1691.4

As I often point out in this blog, nobody effects the gold market like Bernanke. Yesterday morning, following Janet Yellen's comments from the night before, many were expecting hints about pending QE. I must admit, I was in the camp of the disappointed. Were our expectations too lofty?

With the benefit of hindsight, I suppose yes is the answer. But in looking back, I think the expectation of a QE hint, or slightly more dovish language in his speech was reasonable. The counter commentary was that this was not an FOMC announcement, it was simply a speech. A stoic Fed Chairman would not give away secrets or hints, as that would be political. Ok I get that. But lets be real, it's a political job at this point. The stock market has already had a good chunk of its ear bitten off, and serious risk looms across the globe in the coming weeks. So it made sense to me. Hint at QE, and if the stock market prices it in, doing it might not actually be necessary. Because that is after all what QE has become; a tool to make stocks go higher. It doesn't spur lending or borrowing. Fortunately I didn't take too many classical economic theory classes in school, because such classical assumptions are meaningless if not misleading in a zero interest rate environment. I do however know that banks make money by borrowing short, and lending long. Well, with a yield curve as flat as a coffee table top, I am pretty sure we do not have to ask questions about why QE doesn't work.... at least that is, doesn't work to stimulate the economy.

Gold, as has happened in the past, sold off violently when there was no hint at QE in the Fed Chairman's remarks. Shortly after the number stops got triggered around 1615 causing gold to sell off in a single print all the way down to 1603. We then proceeded to make a low of 1579.6, rallying all the way back up to 1593.0. Then, in the overnight session, we had another sweep in the futures. This time, from we dropped nearly 25 dollars in one fell swoop down to 1556. This took place at around 10:30 pm, and while I was not watching it, I was told that it was a 7000 lot order (a relatively huge order... particularly at that illiquid time of night) that sent gold tumbling. Gold recovered from this sweep, and closed higher by just over 3 bucks on the day. In markets where you see consecutive prints 16 dollars away and 25 dollars away from each other, the risk of putting on positions becomes far greater.

Finally, I want to point your attention to the below chart. It is a weekly chart of Gold (August futures). Notice how tight of a range we've been in? With all the intra-day swings we have seen, it is easy to forget that gold has not really moved at all. Sometimes when your so caught up in the day to day life can seem a little crazy. On longer term chart however, we can see that gold is consolidating.


Previous posts mentioned how gold had generally been range bound between 1530 and 1599, and needed to break one way. It looked like we had broken out to the upside last Friday on the bad employment news, but this Thursday's sell off brought us right back into the top of that range.We are seeing solid daily ranges, but looking at the weekly closes of late, we see that we haven't moved all that much.

Have a great weekend

Ben



Friday, June 1, 2012

RALLLLLLLLLY (settle 1622.1)- Terrible Employment data

69k! The low end of the consensus range for today's ever important non-farm payroll number was for adding 95,000 jobs. Needless to say this was a terrible miss. Before the number at 8:30, gold was trading down near 1550, and the S&P was down 15 handles. Weak China data over night was the catalyst for the drop during the overnight session. It seemed logical to me, that given that the S&Ps and gold were down overnight, they might react similarly to the employment data; but this was not to be.

After the number, the S&Ps quickly dropped 10+ handles, while gold began to rally. The bids kept flowing in, and low to high, gold rebounded nearly 87 dollars! In these writings, I am often cautious to ensure that I do not over-react to a one day move, regardless of direction. Today however, I must make an exception. This could be a game changer. But it is not just the magnitude of the rally that changes the gold story so much. Let's take a look at some of the dynamics of today's trading, and why it is all so significant.

1) As of this writing (3:15 PM), front month gold futures (August) have traded 280,000+ contracts. As of this morning's option pit open (8:20 am) only 51,000 contracts have traded. So, nearly 230,000 contracts have traded, almost all on what has been on a sustained up move. This is strong volume, and adds conviction to this move up.

2) This is the most significant stock market/ Gold divergence that we have seen in some time. Recently, I became bearish of gold. My thesis was simple. The stock market is showing no fight, and will keep selling off (correct so far). While gold has shown fits and spurts of negative correlation with the stock market, none has been sustained. As such, I believed that as people sold the stock market, they would sell gold too. Today, may be the first indication that this is not taking place. With gold up 60 and the S&Ps down over 32 this is divergence in the greatest form.

3) The S&P is now below its 200 day moving average and the Dow is negative on the year. 
If negative correlation is to persist between stocks and gold, closing below the 200 day DMA is bearish for the stock market, and consequently positive for gold.

4) We have broken out of the 1530-1599 range that we have been trading in for the last few weeks. Every time we went down into the 1530 area, it was met with serious support. 1581 had served as a big number for a while, but getting through 1600 became the next big challenge. Today, we broke through, and followed through in a big way.


I have written for the past few weeks, as we were range bound, stating that until we broke out of the range, it didn't make sense to play. We broke out. We broke out higher. If you have been on the sidelines because gold was "losing its luster", it's time to get back in. The metal looks like it may have just gotten its shine back.

Have a great weekend

-Ben

Tuesday, May 29, 2012

Europeans view gold as a cash equivalent? August (Q) settle 1551

As we return from the extended weekend, markets had a slight bias to the upside. The main headlines over the weekend included news of capital injections into Spanish bank Bankia, Greece injecting more money (what money?) into their banks, and China continuing to state that it will promote growth (and consequently, as the FT put it, discourage savings). Gold was slightly positive, until mid-day when seemingly out of nowhere, it fell off a cliff. Top to bottom, gold dropped nearly 30 dollars. Why?

The only big headline out at the time of the sell-off was  that Egan-Jones had downgraded Spain from BB- to B with a negative outlook. The Euro got slammed, and as has been the case of late, gold followed suit. Interestingly, while the commodities complex was getting hit, the stock market only sold of minimally. Still I have to wonder; why is this announcement from Egan-Jones a big deal to anyone? Spain is in a lot of trouble. This is not news and it provides no new information. So why do we care?

I have to be careful, because as I write, I find myself tempted to use terms like "supposed to be". The market is "supposed to be" a discounting mechanism. As such, news effects markets because of the perceived interpretation of how it might impact the value of an asset. A company raises guidance, at an unchanged P/E multiple, their stock should rise given expectation of better earnings. The Euro-zone doesn't come to a resolution at an important meeting; the Euro might sell off because market participants become concerned that positive solutions will be harder to come by than had been anticipated. But of course, markets aren't "supposed to be" anything. They are simply markets. Nonetheless, material sell-offs prompted by news that is already known, means that markets are trading off of headlines, even if they do nothing to change the sphere of knowledge that exists among market participants. I could cry about it, or just say what is inherently obvious: Markets react to Ratings Agencies despite the fact that their calls are almost always entirely composed of information that the market is already fully aware of. 
______________________________________________________________________


A friend of mine sent me the following article this afternoon, and it is very telling about the German stance on gold.
(http://www.telegraph.co.uk/finance/financialcrisis/9298180/Europes-debtors-must-pawn-their-gold-for-Eurobond-Redemption.html)


Conclusion?

It's bullish.

I thought the author, Ambrose Evans-Prichard, put it best stating "In effect, Germany would share its credit card to slash debt costs for Italy, Spain and others". The kicker is that Germany would require the countries they helped to put up gold as collateral. We already know that China and India believe that gold is a currency equivalent (if not better). With Germany indicating that they feel the same way, the long term bull case just gets better and better. Still, we are range-bound, and until we get at least above 1600, I see no reason to get your feet wet.


Monday, May 21, 2012

An Interesting Nugget from Art Cashin; settle 1588.7

Over the past few days I have found myself feeling compelled to hit the mute button on my TV multiple times. Few things get under my skin during the day more than the commercial with the AFLAC duck singing to newborn children. As the commercial gets more and more airtime, I take stronger vows to avoid ever buying supplemental insurance from them. The incessant coverage of the Facebook IPO also got to be a little bit much for me. While the IPO and all that came with it is rather fascinating, I just wanted to hear something different. Today, I got my wish in the form of commentary from Art Cashin.

The equities started in the green from the get go today, and extended those gains as the session pressed on. Still, Mr. Cashin was cautious. Tops on Cashin's mind was the topic of distribution days. A distribution day is when you see a broader index close lower on the day with higher volume than the previous session. (For a more in depth definition you can visit the following IBD link http://investdaily.custhelp.com/app/answers/detail/a_id/276/~/what-exactly-is-a-distribution-day-in-a-market-index%3F)

He pointed out that every day last week was a distribution day. How many times has the seasoned market vet seen this? Zero. On a less technical note, the same things that Cashin warned about before the selloff, are what have him concerned now. Namely, he is wary of the potential for spiraling bank run in Europe. It is common knowledge that withdrawals have begun to accelerate in both Greece and Spain, but so far they have been contained. If however there is a panic or scare, a bank run could cause chaos that policy makers simply wouldn't have the power and/or speed to stymie.

In the world of gold we had a rather uneventful day. We reached a 1599 handle but were unable to work through resistance at 1600. We also found support at the 1585 level, keeping us rather range-bound on the day  (fuller analysis can be viewed at Dan Norcini's blog;  http://www.traderdannorcini.blogspot.com/2012/05/gold-continues-its-bounce.html)

July Gold options volatility came in over 2 full vols today. The big data point we'll all be looking to will come next Friday, the 28th, in the form of the employment report. While we will get consumer sentiment this Friday, last reading was the highest its been in years, and that was certainly not a good short term indicator of market direction. As such, absent any unforeseen insanity out of Europe, I imagine we will stay relatively range-bound, and for vol to continue coming in.

-Ben

Sunday, May 20, 2012

Kyle Bass, QE, and Japanese Pension Funds (Settle 1591.9)


As I perused the blogs this morning, I saw that Zero Hedge had a link to a Kyle Bass case study on Japan. I decided to take a look, and as tends to happen when reading  about Bass' work,  became captivated. The link is available here (http://www.zerohedge.com/news/presenting-kyle-bass-harvard-business-school-case-study#comments) for anyone interested in reading. I wanted to point out one particular passage at the bottom of page 9 which reads as follows.

"The mechanism Bass had in mind was that as a country attempted to "monetize" the debt, the resulting increase in inflation expectations would push up nominal interest rates, as well as increasing the interest rate risk premium. When this happened, interest payments on debt would have to increase, creating further need for monetization, and ultimately, a restructuring. In arguing this view, Bass cited work by economists Carmen Reinhart and Kenneth Rogoff, who had shown that soverign debt crises often precipitated inflation, exchange rate crashes, and banking crises".

On Wednesday June 20th, at 12:30 we will get the next FOMC announcement, followed by a press conference by Chairman Bernanke at 2:15. The decisions made at that meeting will certainly be based on events yet to come. If we are to see some stabilization in Europe over the next few weeks, one can reasonably assume that nothing except for maybe a few phrases (that we will all overanalyze) in their minutes will change. So is Goldman's call that more quantitative easing will be announced on this day a bet that the next few weeks will be painful? I think so.

I suggested to a colleague that the mere fact that Goldman's Hatzius went public with this call a few weeks back, meant we certainly wouldn't be getting QE anytime soon. Knowing what we do about Goldman, if they were really anticipating such policy action, would they tell all of us? Unless the new "mea culpa" public relations shift among banks is real (Dimon/Blankfein admitting faults and mistakes), it is safe to assume Goldman would be better served to position its own trades according to this thesis. But hey, perhaps they already have the trades on, and are thus already in front of the trade. This call seemed just so surprising at the time, that I felt I had to pay attention to it. Things have since played out in a way that makes me think this call may be real.

 Hatzius has said the following for with regard to the potential for a QE announcement at the June meeting.
"After June the probability goes down. June is the time that Operation Twist is scheduled to end, and that's a natural time to decide whether you want to have a successive program," he says. 

"Our baseline is still that we will see something in the second quarter by the June meeting."
(http://www.newsmax.com/StreetTalk/Fed-easing-1940census-hatzius/2012/04/03/id/434703)
It makes sense that the end of the twist would be a natural time to bring back QE. Still, this reasoning seems too simple. The Fed is running out of policy options. Hatzius knows that. "The end of the twist" does not seem to be a good enough reason for the Fed to enter back into another round of quantitative easing UNLESS it is amidst a backdrop of economic frailty. Namely, a weak stock market. Bernanke has said that the first thing he thinks about when he wakes up is where the stock market stands. It is well known that Bernanke thinks that a robust or at least stable stock market is vital to the recovery. Recent price action has shown a stock market with very little fight in it. Is it possible that the Goldman call was really a bearish call on the stock market? While June 20 is a month (eternity) away, the way the tape has behaved, and the dramatic sentiment shifts (hard to believe consumer confidence was at a multi-year high just a few weeks ago) we have seen set up perfectly for a scenario grave enough in which Bernanke's all in "growth" bet will require some candy (QE) to give the stock market a sugar rush.

It is hard to envision a scenario in which institutions don't buy the stock market on a QE announcement, but that pop might be short in duration. The Bass commentary offers food for thought about what really happens when a debt laden nation engages in QE. The government issues money to buy its own debt. As such, there is more money in the system. More money in the system gives at least two reasons to buy stocks. More money in the system, in theory, will cause money pass through the system at an accelerated rate, promoting growth. Additionally, in a more inflationary environment (which money printing promotes) bond holders will see erosion in the real value of their bond holdings, causing them to reach for growth opportunities (ie equities). The second reason is clearly not going to cause people to buy stocks, as currently the 10 year note yields less than the "2%" inflation rate. But whatever the reason, its QE! Buy! Buy! Buy!
Bass' case study points out a more economically fundamental reason why this should not work. If investors really did leave the bond market, the lack of demand would push interest rates higher.
" The mechanism Bass had in mind was that as a country attempted to "monetize" the debt, the resulting increase in inflation expectations would push up nominal interest rates".
As interest rates rise, the cost of funding our (American government debt) debt increases. If the Fed wants people to allocate their money to the stock market over time, it will have to pick up the slack in demand by continuing to buy treasuries ad infinitum. In our kick the can down the road world, QE will simply drive us further into the misunderstood government martingale strategy inwhich we are all unfortunately investors.
To be fair, Bass' case study relates to Japan, but I believe that the general underlying thesis applies. Interestingly, last week, Okayama Metal and Machinery, became the first Japanese pension fund to invest in gold. (https://www.kitcomm.com/showthread.php?t=104768) Perhaps  government monetization of its debt is a downward spiral for governments as discussed. Regardless, its implementation becomes freakishly bullish for gold. When you see a previously absent player in the gold market decide to get its feet wet to hedge its sovereign risk, especially at a time where gold held support above 1522 last week, it looks more and more like a buy. Incredibly, following what pundits were calling "the end of the gold trade", gold closed up on the week. The volumes and resiliency on COMEX futures contracts shows the metals strength. The aforementioned economics behind likely central bank actions support the bullish case as well.

Thursday, May 17, 2012

Gold Rallies, Stocks Sell off; Settle 1574.9

It feels like a long time since we have seen gold up nearly 40 dollars in a day. Making a high of 1579.8, gold was not able to quite make it back to the 81 level it had broken down from. I mentioned last Friday that I suggested a friend sell his GLD because gold trailed off below that 81 level late in the day. As such, trading action tomorrow could be critical for gold going forward. While we dipped as low as 1526.7 this week, a close near 1581 would make us nearly unchanged on the week... hard to believe.

As I write, 15 minutes before the stock market close, I am watching gold holding still at 1573 as the S&P makes new lows for the day. I think the persistent sell off in the stock market makes sense. The risk of contagion in the European banking system is being taken more seriously with every headline about deposits leaving European banks. I woke up today to read about how massive bank withdrawals were taking place in Spain, not just Greece. At a time like this, the "value investor" who snootily boasts of the great value they find in this market because they "take a long term view" has the potential to get crushed. Why is risk greater now than say 3 months ago? Has much changed? Not much and no, not really. So the cheap valuation shopper will use this as logic for why they are buying and not concerned with the erosion of their portfolios. I sure hope no such person would ever manage one of my portfolios, because they clearly miss the point about how perception drives the market.

Perception can be a self fulfilling prophecy. It does not matter if those who are withdrawing their life savings are being silly or shrewd. All that matters is that they are doing it. A few headlines here and there, and the run on the banks can happen so quickly that the situation can spiral before anyone can do anything to fix it. Let us not forget that there are a limited number of tools central banks have at this time as well. Cutting interest rates is hard to do when they are already nil. So stop looking at P/E multiples and comparing them to historical levels. Stop questioning if this is "sell and May and go away". And stop wondering if it is possible that the stock market can really continue at such a steep trajectory to the downside. It doesn't matter. The truth is, the cards are all in place for what historians might later incorrectly deem to be a "black swan" event. If you want to stick your neck out and try to buy the stock market, you well might see yourself up 8% in a very short period of time. But in my eyes, such a play has a very poor risk reward profile.

Why do I keep mentioning the stock market? Because it is the only thing that keeps me from being massively bullish on gold. Over 200,000 contracts traded yesterday (June futures), and gold was never able to even re-test the overnight low of 1527.6. Today, another 200,000 traded (this is very high volume compared to the last few months where you would often not see volumes exceeding 100,000) on a nearly 40 dollar up move. While one would be right to argue that yesterday's volume was on a down move, a closer look at the trading action yields a bullish signal. The lows from yesterday were made overnight, but the bulk (about 2 times as much) of the volume traded during the American session (8:20am- 5:15pm). During our session the range was not as wide, and as aforementioned, found a floor about 5 dollars above the over night lows. Clearly, there is no need to make the case for why today's high volume on an up day is bullish.

Looking back a few posts, I referred to futures trading as a losing game. I spoke to one trader I knew and he disagreed (he makes money). My thesis at the time was that the algos were working overdrive and making trading human vs algo (which is a losing game). The one thing that I recognized at the time that did not fit with my thesis was the volumes given the ranges. The ranges were not particularly wide, but you were still seeing strong volume. When ranges are wider, it stands to reason that stop fishing algos will be more active, because there are more stops for them to trigger. But by that logic, it doesn't make sense that the algos are accounting for the extra volume when the trading range is tight. So maybe there was some real positioning going on. Seeing the support yesterday tells me that trend might be continuing. The algos, were they having their way, would've pushed to see what stops they could trigger below the low. Their inability to do so indicates that there was real buying.

This real buying is why I believe the bull case is building for gold. The reason I do not think it is so easy to jump in, has everything to do with concerns that a lower stock market could lead to forced selling in gold for margin purposes. I am not sure if and what policy responses could be capable of stopping a bank run. And even if a bank run were to be stopped, I question what stimulative measures could possibly be enacted by both Euro countries and the US that would make people giddy about the stock market. If Goldman's Jan Hatzius is right then we will see QE3 at the next Fed meeting in June. But we have a month until then. Even if our fears are quelled about Europe, I do not see a catalyst that would cause a rush of buying other than the notion that again "risk is off the table and stocks are cheap". As such, I see continued risk to owning stocks, and consequently, short term risk in holding gold. That being said, I see no reason to delve into deep conversation about where to get in. It is better to let the market tell you. Anyone could buy at a random level and get lucky, but lets first see if gold can build a base. If we have more days like today, where gold and stocks trade in a near perfect inverse correlation, then we can decide that a pattern has been established, and re-initiate longs. But one day does not a pattern make, and I believe it makes more sense to wait until the gold market signals that it has stabilized before initiating longs.

Tuesday, May 15, 2012

And it begins... the run on Greek banks

What was a positive day for equities has just gone negative. I won't give numbers, because they're not official; but one thing is clear, its fear of the Greek bank run.

Gold has made new lows on the day, the S&P is down about 6 following a day where they were up as much as 13. Can't blame the Greeks, I would've done the same thing. What is most impressive to me is that the sell-off has not been more drastic. The thesis continues; sell your risk assets.

Monday, May 14, 2012

Greek exit? Gold circa 1557

Following my post on Friday where I suggested the risk reward made selling a gold position reasonable, I was curious to see where gold opened up Sunday night. I saw we opened only slightly lower, with the S&P off about 5 handles. I took a quick look at some headlines and saw it was all about Greece's possible Euro exit. How quickly we've moved. Looking at all the headlines, it was as close to a gimme as you get in this game that gold was going to sell off today.

Do not under estimate the speed with which this market sentiment has changed. Last week Citi raised its probability of a Greek Euro exit from 50 to 75%. Now everyone is starting to take notice. Zero Hedge posted a piece from Citi's Willem Buiter from 2011 (link at end of this post), discussing the potential implications of a Greek Euro exit. What I found striking was the similarity between what Citi was saying then, and comments Art Cashin has made of late with respect to the topic. It is merely that the awareness of such an exit from the Euro currency would cause a run on the banks by Greeks looking to recover money before it was converted. Such a bank run, as Cashin pointed out, could spook the most sickly Euro debtor nations, and cause bank runs there.

Its all setting up nicely for the story the long term gold bulls tell, but I believe there is selling to come. People will sell whatever they can to fund their margin accounts and gold, the so called "broken story", will be on peoples' liquidation radar. We will continue to watch the market, but it is too early to stick your neck out and get long. Those who try to push the market know which way will be easiest to push.....and its not up. The risk reward for being long any risk asset is unfavorable. The "we've been down so many days in a row it has to change" logic will cause a lot of pain. There is something brewing in this market, but you will get a chance to get back in on the way up. You might not be so lucky to exit quickly on the way down.

http://www.willembuiter.com/exit.pdf

Saturday, May 12, 2012

Should a long-term holder of gold take profits?

A friend of mine, who is long GLD from approximately the futures equivalent of 1250 texted me this week asking whether he should dump his gold. My answer was that he should wait it out and be patient. Yesterday afternoon I gave him a call and I said I had changed my mind and that he should sell it. Here was my reasoning.

Speed is everything. I am a believer that the direction of gold is determined largely by the difference in the relative speed of the market on down moves as compared with up moves. What does this mean? Right now, as has been the case for some time the most swift moves in gold are to the downside. Is it because someone repeatedly comes in and dumps about 7000 contracts in one fell swoop? Perhaps. But whatever the reason, the bigger sweeps tend to be downward. A trader who sees this in the market is more likely to play from the short side because he knows that if he has a position on and the market sweeps, he is probably a lot safer being short. Over the past few weeks and months we have seen multiple market sweeps of between 8 and 20 dollars. I have often stared in disbelief at the screen thinking my trading system had failed. Each of these times, we have moved downward. A month of profitable trading can be swept away in a second when your talking about moves of that magnitude. Until there is a balance in which way the market sweeps (or simply less quick drastic moves all together), downward movement snowballs because the risk of stepping in from the long side can be that great.

It is not fear of getting caught in a sweep however that made me tell my friend to sell. As a holder of the GLD, he is not playing for 5 bucks the way a futures trader would. To a gold investor, these market sweeps are rather irrelevant. That being said, daily moves are quicker to the downside as well. Gold tends to test the numbers that are obvious. The 1530 area is on everybody's radar, and with the way gold trades you can ascribe a high probability that it will test at some point soon. While I continue to be a believer in the gold story and someone who believes we will probably make new highs in the next year, the likely speed of a down move is too great to risk being long here. My final words to my friend were this:

If we can manage to hold this 1581 number and build a base, then you can always get back in. If the story changes, and the downward momentum stalls, you can note that the environment has changed, and buy back your sales. Given what we are seeing now however, which is all we can really work with despite any long term feelings we might have, being long does not make too much sense. If it is 50/50 as to whether we move up or down next, then you would want to be short, because you will likely get more out of the down move. If I am wrong, and we move higher, I think you can probably buy it back giving up no more than 30 dollars. If we head down to 1530 (50 dollars lower) you have the benefit of watching the market, rather than panicking about where to stop yourself out.
_____________________________________________________________________________

One thing I have learned is just how hard it is to time change in correlations between markets. In my philosophical mind, I believe that gold should trade inversely with the S&P, as people will once again flock to gold when things are bad. In my practical mind though, I see that gold is trading with the Euro, the Euro has broken 1.30, and the 10 year is now trading with a yield of 1.83%. 1.83% is lower than the stated (and I use the word stated intentionally) rate of inflation of 2%. While practically it makes no sense that we could even be having a conversation about a higher stock market in a world where people will let inflation outpace their income, we just have to accept it for what it is. There is demand for dollars in tough times, and it makes buying gold in dollar terms that much less attractive for now.

Thursday, May 10, 2012

The losing futures game

After persistent sell offs for the last few days the market took a bit of a breather today. Futures trading was slow, but surprisingly a solid 125,000 contracts exchanged hands. With nearly 200k the last two, more volatile days, it is clear that volumes are picking up a bit. With open interest still hovering around the 400,000 level, we are seeing days where nearly half of the open interest trades. Need anymore be said with regards to how much of this market is being day traded? I don't think it would be much of a stretch to say that the algorithms are doing a lot more of the trading then the people are. In such an environment it becomes very difficult to trade without keeping wide stops. Yesterday, I had the direction and size of direction called perfectly, and still lost money. Why? Because I kept stopping out only to watch the futures retrace to the levels I was buying them at, and then higher. As I have written about before, the algos are constantly searching for large stops to trigger. As such, in an algo heavy market the probability of getting stopped out is that much higher. Without strong conviction about the markets' direction, the risk reward makes short term human futures trading a pure loser's game.



Monday, May 7, 2012

Charlie Munger "Gold is a great thing to sew onto your garments if your a Jewish family in Vienna in 1939 but civilized people don't buy gold"


http://video.cnbc.com/gallery/?video=3000088395#eyJ2aWQiOiIzMDAwMDg4Mzk1IiwiZW5jVmlkIjoieU10VDJBbWtabDRocG4rRVRNSHRLQT09IiwidlRhYiI6ImNvbW1lbnRzIiwidlBhZ2UiOjEsImdOYXYiOlsiwqBMYXRlc3QgVmlkZW8iXSwiZ1NlY3QiOiJBTEwiLCJnUGFnZSI6IjEiLCJzeW0iOiIiLCJzZWFyY2giOiIifQ==

The above is a video of Becky Quick's interview with Charlie Munger. Approximately 9 minutes and 15 seconds into the video Munger says the following "Gold is a great thing to sew onto your garments if your a Jewish family in Vienna in 1939 but civilized people don't buy gold".

Bullish or bearish on gold, one has to scratch their head and wonder what prompts Mr. Munger to use this reference to 1939 Viennese Jews. We can all go back and forth ad infinitum about the merits of investing in various asset classes, but we should be able to do so in a far more civilized way than Mr Munger chose to in this interview.

Did Mr. Munger intend to come off as anti-semitic in his comments? He will be the only one who ever truly knows the answer to that question. Nonetheless, such comments cannot be taken lightly. Particularly at this time of financial instability in Europe, where socialist parties are gaining increasing popularity and power, it would be historically ignorant to flippantly sweep such comments under the rug. How Berkshire has yet to apologize for such commentary is far beyond me, but I sincerely hope that viewers of this blog do their part to make sure others are aware that these comments were made. Warren Buffet is not simply an investor, he's an American icon. He has been one of America's biggest cheerleaders and has become adored  (deservedly so in my opinion) by many. Charlie Munger's words were not his, but as the head of his organization, Buffet has a moral obligation to come out and denounce the comments his right hand man made in this interview.

Thursday, May 3, 2012

Einhorn's Jelly Donut Piece

http://www.huffingtonpost.com/david-einhorn/fed-interest-rates_b_1472509.html

The above is a link to today's Einhorn piece talking about Fed Policy. It's a great read; While Einhorn doesn't like Fed Policy, he is long gold because of the current policy.

Awaiting tomorrow's big Employment Number (circa 1635)

The market's eyes all face toward tomorrow's Employment number. There is a tangible shift in the way in which market is looking at economic data.  Today we saw weekly employment claims come in on the low end of the range (fewer claims) and stocks quickly rallied. At 10am, when the Non-manufacturing ISM number disappointed, the equities went negative and gold got a small pop. The momentum is certainly to the downside here, but tomorrows number can change everything.

As for gold, open interest is increasing everyday (currently at paltry levels) which could signal new longs coming into the market.While I anticipated that we might hold the 1650 level and build a base higher, we have seen weakness in the past two days. Still, I believe the trend will remain higher. With decent earnings the stock market has seemed to lose its steam. A disappointing jobs number tomorrow could really cause things to tumble. If the recent inverse correlation between equities and gold continues, then we can expect a bad number to be the beginning of a gold bull charge....and you might just start to hear the phrase "safe haven" a whole lot more.

Recently (Fed announcement for example) large sell orders come in right before economic data to push the market. If the number is a big miss, a tremendous opportunity to buy gold on the dip might present itself (operating on the assumption that gold picks up a safety bid). While 1625.5 was support last Wednesday, I am hearing 1610 as the first level of support, and 1580-1590 as the next level one could buy it.

Friday, April 27, 2012

Bring On the Bull---Lets be real about inflation (circa 1665)

The Bull is back. While the market has moved remarkably little of late, we have gotten some trading action that I believe indicates that we are going to go higher. Volatility based on day to day price movements has been remarkably low. Option volatility is at 3 year lows. Despite this, we tested the bottom of the range that we had been trading in. Gold traded down to 1620 earlier this week, but was unable to take out that low in Wednesday's fast flying market. Yesterday (thursday) June Gold settled at 1660.5, breaking a key downtrend. Today, we saw bullish follow through making a high of 1668.4. The next target is in the 1680 range. We failed to breakdown despite generally bearish sentiment, and the trading since has been technically bullish.

Have a Great weekend

Ben

Wednesday, April 25, 2012

Fed announcement Pending on May Expiration (circa 1645)


WEDNESDAY, APRIL 25, 2012

Fed Announcement on May Expiration (circa 1640)

Today is Expiration for May gold options. We are trading around 1640. While we have experienced some intra-day volatility; looking at the chart will show you just how little we have moved in the last few weeks. I discussed the fact that we tend to stick around 1650 for extended periods of time. Part of the thesis put forth here was that the longer we stayed here, the more bearish for gold. The idea behind the thesis is that the S&P's attractiveness would make gold look like a bulky weight in the portfolio and cause a sell off. That thesis must now be amended. The stock market has not continued floating higher, and political concerns in Europe have spooked some investors. I can say personally, simply from observing, that there has been a breakdown in the correlation in the way that gold and the stock market trade. They are neither inversely correlated nor correlated, they just seem independent of each other for now. As such, I think it is very difficult to look at stocks as an indicator for gold.

Both May and June (May expiring today) gold options are bid this morning. The Fed announcement is at 1230 today. No announcement impacts the price of gold more than the Fed announcement (even though the announcement rarely changes). I have been baffled by the trading action post Fed announcements too many times to try to come up with any logical arguments for what will happen, but I will say the following. Regardless of the news; we tend to sell off. If you had to take a leg, the short side would probably make more sense. The low from 2 days ago was approximately 1620. If things take off (and I don't think they should) to the downside, then look for support in this area as an opportunity to buy.