When it became clear I would begin trading gold options in September, I immediately imagined what my position would look like 4 days into the job. The one thing for sure was, I would look to buy a lot of calls right away. But like many "sure things", this was not to be.
September is historically bullish for gold. "Buy Rosh Hashana and sell Yom Kippur" as the saying goes. Starting right around the time of Rosh Hashana, in the most bullish (historically) month, with Syria on the table, it seemed logically hard to see gold going anywhere but up. Escalations in the Syria situation or any sort of Middle East destabilization tends to be bullish for oil, and metals prices are certainly correlated to moves in oil. So logically, this looked like one of the bigger layups to buy gold we had seen in some time; but it didn't quite work that way.
The important signal that the bullish thesis was not working was gold's inability to test the top end of it's range in the midst of news that should've brought buying interest to the market. Gold was caught in a range between 1375 and 1425. With Kerry's tough language on the need for action in Syria, the U.S. would look weak were they not to do something proactive. In the end, it is fair to say that the settlement made was just enough to show that action had been taken without really doing a whole lot. And that's fair. Without Britain as an ally (British Parliament voted against getting involved in Syria) Obama realized the potential to be forced to go it alone were "military action" or "targeted strikes" to be the policy option de jour. BUT, that did not become clear until later. Even in the tensest moments, where fear of escalation was highest, gold couldn't even fight its way to test 1425. This should've made the bulls take concerned notice.
Then, what I believe to be the most important event took place. Goldman Sachs talked about gold having hundreds of dollars to drop from current levels. As a simple man, I am prone to look upon recent experience with great gravity when considering the likely next move. As such, I looked back to the last time we came off hundreds of dollars in the spring. What precipitated that? Who knows, but it did just happen that Goldman had called for lower gold just days before we came off. At this point I had seen everything I needed to realize that what seemed to make so much sense, might not be the likely outcome after all. Gold simply wasn't going higher, and I was buying puts that were expensive enough to make managing the position all the more difficult.
Monday and Tuesday of last week featured a clear effort by the algos (or whoever pushes gold these days) to push gold lower. Gold would hang out during the active trading day above support, and then, after the options pit closed, and many had gone home, you would see the futures making new lows. These lows were of course made at times of lower volume, when pushing the market was easier. Tuesday evening, gold was pushed down to a low of 1391.5 on low volume. This number, for those following levels, was completely meaningless. It was between well known support around 1280 and 1300 (the 100 handle's have a way of acting as meaningful levels). Coming into the huge Federal Reserve announcement, where many thought that tapering of bond buying was for the first time legitimately on the table, pushing gold 10 dollars lower should have been a pretty easy task. It never did push lower, and that stands as the low of the move. Gold rallied around 1:30 pm on Fed Wednesday to 1320. Mind you, the Fed announcement was not until 2pm. We had not tested known support only 10 dollars below the over night low, and yet, it was getting bought....then the big announcement of no tapering, and a rally of over 75 dollars from the over night low. It seemed like maybe the bulls were back in the driver's seat. But the bulls only had a short time to feel that glimmer of encouragement.
The overnight high into Thursday's post-Fed day was 1375.4; notice, this is the bottom end of the range that gold fell out of when bulls (my self included early on) were looking toward 1500. So, as an important support level that was broken, 1375 should serve as resistance to the upside. But with more money coming to the bond market, and the promise of lower interest rate's, perhaps gold would break through the resistance and regain its upward momentum. 1375 however, would remain the high, and gold now sits in the 1330s. So where from here is always the question. I believe the likelihood of a big move is much greater to the downside than the upside. Had gold continued to rally after the Fed announced no near term tapering, then perhaps it could've pushed it through resistance levels that really mattered to support the bullish case. But for now, you have to remain neutral to bearish if your looking 100 dollars either way. Gold could rally back to 1375, but even if it breaks to the upside, its breaking right back into the middle of the range that gold spent weeks bouncing around in.... and that makes even the first bull case look unappealing. To put it simply, a series of potentially very bullish catalysts (Syria and the Fed not tapering) were present during gold's most historically bullish month, and it was unable to break back up through resistance. And the cherry on top is that the bank that had correctly called gold's sell off last time (and so far has been right this time) has a target that is hundreds of dollars lower than where it stands today. On a hundred dollar wide outlook from 1335; 1235 seems a lot closer than 1435.
-Ben Ryan
