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
Friday, August 31, 2012
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.
_______________________________________________________________________________
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.
_____________________________________________________________________________
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.
____________________________________________________________________________
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.
_______________________________________________________________________________
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.
_____________________________________________________________________________
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.
____________________________________________________________________________
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.
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.
________________________________________________________________________
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.
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.
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