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

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.

Collapse and Comeback... gold trading circa 1652 (4/17/12)

As I write an hour before the close I cannot believe that we are nearly unchanged. This morning when I got to the floor around 630 am, we were pushing the overnight high of 1654. After a night of no volume, pushing the high at this hour was certainly bullish. It would be hard to say we broke out, but perhaps "crawled out" and worked our way to a high of 1657.8. The S&P futures were up about 7 as we broke 1654 to the upside in gold. I was looking for gold to tag along, but then the divergence began. As the S&P continued to rise, gold fell to below 1654. As we approached the stock market open, gold simply could not get above that 54 level. This was a bearish signal, as the pickup in volume (which is normal as we approach the stock market open and the GLD hedging volume comes in) was not enough to get us to the level we had just broken out from. Knowing that, and knowing there was support around 50 (from previous days' lows), a break below 50 was a great opportunity to sell. If you did, you got to watch gold run all the way down to 1635.2; I thought we might dip to the 30 area, where there was supposed to be some support, but this low held the rest of the day.

Following this sell-off, much to my surprise we rallied all the way back and even took at the morning high (made a new high of 1658.4). It is rare you'll see such a tremendous rally following a 20 dollar sell off intra-day. Still, the theory from the last post holds. We are hovering around 50 again. The S&Ps are up 25 handles. Why own gold? So I believe the thesis stands. The longer we hover here, and the more the S&Ps perform, the more bearish it gets for gold. We will have to break above 1660 and hold for that to change.

Quiet before a storm? Gold settle 1649.7

I had a conversation with a friend/ gold trader yesterday and he made an interesting point. We both agree that gold has a tendency to hang out for extended periods of time around the 1650 level. The days range, 1642 to 1659.6 was established overnight. Throughout most of the day however, we traded between 48 and 54, with little in the way of exciting movement. I asked my friend what he thought about this 1650 area and how it would effect the options. I asked assuming he would probably say something to the effect of "Well the more we sit here, the more we can expect volatility to get hit". That is not what he said. Instead, he pointed out that if we sit here, especially if the equities perform, gold will begin to lose its luster to investors. The "why should I be in gold if equities are performing well" mantra would be back in play. This, as he points out, leads to a bearish bias.... but not yet. We would have to see gold waver in tight ranges around 1650 and the equities start to rally for this to pan out.

It is worth mentioning that 5000 of the May 1580 puts were bought today. May options expire on the 25th. The puts went for just over 3 dollars (a dollar = 100 dollars in gold, so each option cost approximately 300 dollars). So, in essence, it is only an outlay of 1.5 million dollars, not super massive for a big fund taking a shot. Still, I like the concept behind it. Everyone and their sister seems to be bullish on gold. For the time being I think it makes sense to trade the ranges, as I expect us to sit still for a few days. But perhaps if the thesis my friend had comes true, and equities perform this week, we will see options traders scrambling for puts. In that case, this speculative play could pay off well as traders get lulled into a slow market sense of bored comfort.

As far as equities go, it was interesting to see that the S&P was down small, the Nasdaq was down 22, and the Dow was up over 70. The Nasdaq drop is due in part to Apple's big hit, but it is interesting to see the divergence among equity indexes (For those who have begged for an apple pullback.... here's your chance....)

Gold is worth talking about again- 4/10/2012 Gold Circa 1660

Today was an exciting day for gold. As all markets began to capitulate, gold started to catch a bid around 1640. Within 20 minutes we had broken last nights high (1655.9) and made a high of 1664.8. All the while, the equity markets were making new lows. Gold was on a rampage. If you tried to get short, you unquestionably felt some pain, because every pull back on the way up was small and fast.

Over the past months, gold has slowly grinded higher, and the swift moves were always to the downside. This swift up move, as well as the fact that we are not moving in lock step with the S&P makes the environment for gold more exciting.Trading 60 now, I expect that we test 68 by some time tomorrow, but don't feel comfortable making any bold calls. I am far more used to the gold/ stock market correlated behavior, so I think this is a good time to watch and pick spots rather than being too bold.

One fundamental piece worth noting is that the taxing of non-branded gold items is on hold in India. (see the following piece http://www.vancouversun.com/business/Indian+jewellers+strike+after+government+delays+gold/6394400/story.html)
I am a believer that the long term bull case for gold rests not only on the notion that central banks will continue printing, but also the fact that gold IS money to the residents of countries like India. Anything that promotes buying gold in countries like India is bullish for the metal... lifting a consumer tax certainly fits that bill.

 For anyone interested in watching a piece about how gold fits into Indian culture; please watch this video that was recently produced by 60 minutes.

http://www.youtube.com/watch?v=Xchc2ezcHXA

Happy Tuesday,

Benjamin

We got our low... then we rallied

As is customary in the algo controlled gold futures market, we made our low as expected. The low did not show a whole lot of conviction however. We were stuck on 1614, the old low for what seemed like an eternity (it was probably about 5 seconds). When we broke, we only went down a dollar, to 1613, which now stands as the low. We are trading 1622.6 as I write. 1628 was supposed to be support on the way down, and will serve as resistance now. At these levels I continue to think that the risk remains to the downside. A few of the technicians I have talked to/ read feel that the 1575-85 range is the logical target to the downside. At this point stepping in on the long side seems to offer too little reward given the way this market can move lower on a dime, but only goes higher slowly.

One thing to keep in mind. Both the pit and the electronic market will be closed Friday. But we do get the ADP employment situation (one of the most important economic data points) Friday morning. It will be interesting to see how traders position themselves for a long weekend, which unlike all others, contains a critical number that they cannot trade off of. My guess is the number will not shock too much to either side, and it will all be forgotten by next Tuesday. Still, options could pick up a bid as investors look to protect themselves from any surprises that might lead to a big Monday move.

time to make new lows on the day?

10 minutes til the gold options pit closes. 164,000 futures contracts traded, sitting at 1616, we're 2 dollars off the low of 1614. On days with this kind of volume, they love to push it lower near closes (whether our options pit or the stock market close at 4). Some momentum could pick up soon.... I like playing the breakdown, and taking it off if you don't get it within the next 20 minutes (its 1:27). You can stop out easily 4 dollars higher (1620)

Fed announcement....

As has been talked about here plenty of times before, gold always sells off on anything the Fed does... good or bad. Now that they're saying QE is on the back-burner, no surprise, we're sitting about 30 dollars below where we were pre-announcement We sit here at 1645,  8 dollars below support at 1653. I don't have the next levels on hand, but I would not try to buy this dip right here. A winner is probably good for 10 bucks, but I think another break below the low (currently 40.2) could lead to a serious momentum pile on. The S&P has recovered well, and made a low of 1399.5 (front month futures). We're 45 minutes away from the stock market close. 1400 is an important psychological level. If selling comes in on the close, and we break the low on the S&P, gold is for sure going with it. Its not the most likely of scenarios, but if it happens, the pain will be severe. Even before the Fed announcement  today, we saw gold sell off with far more conviction than the grind it made higher. Being long right now is a scary proposition, with a risk/reward profile that I think we could all do without.