Wait... Europe Doesn't have a comprehensive plan? welcome back Gold

Europe reminds me a little bit of a group of my friends and I when we took a high school class entitled "short stories". None of us ever did the reading, and before class, we would all scramble to ask those who did to give us summary points so that we could pretend to have any clue what was going on. This worked out great, until one day, one of the "readers" decided to tell one of us some false information about the previous night's reading. When asked how a woman in the story had died, my friend, aloud in front of the class exclaimed "She was crossing the street at night and a car without its lights on struck and killed her"... Suddenly laughter and shock erupted from those who had done the reading... and the rest of us quickly figured out what happened. Turns out she had died from pneumonia.... O high school stories.

So Europe has been scrambling to come up with some semblance of a plan, and it becomes clear that they don't have one. The market came off big on the open, but perhaps it was because some interpreted that the entire summit due for tomorrow was canceled. It wasn't, rather they canceled a finance minister's meeting, which does not hold the same magnitude. The market recovered, but down 25, we closed at the lows of the day on the S&P. This market doesn't have faith in a comprehensive plan come tomorrow, as it should not. But now it is time to shut out the panic filled media and think about how we can capitalize on what looks to me to be a great opportunity... particularly for gold... and soon for equities as well.

A few posts back (Risk Off time, Oct 17) I pondered what it would take to see the strong directional correlation we had seen today between gold and the stock market break. I mentioned how we saw a few signs that it was breaking a bit, but that the options and often the underlyings (stocks/gold futures) were generally trading the same. But that all broke this morning. As the S&Ps fell, gold dropped all of 5 dollars from 1655 to 1650, which it held before rising 50 bucks to settle at 1700.4. As stocks sold off, the volatility rose as it usually does when the market is down. The Vix (front month volatility) rose back above 30... in fact yesterday was the only day in October it had been below. Gold volatility also rose, but as mentioned, gold was up. Call options picked up a strong bid after being picked on for the last couple of weeks. During gold's rise to it's highs circa 1930 (the dollar amount) the pattern was that as gold rose, so did volatility and call buying. 1 day does not a move make, but we saw that relationship that the gold bulls have missed so much today.

Last week, gold rallied and failed around 1685 on four separate occasions, but today gold had no problem climbing above it. I am told that 1696 is an important level as well. A floor trader pointed out that not only did it break, 1696, but that it did not break below it once it broke above (bullish sign). The high in gold (I'm not sure of the exact figure) was approximately 1925. The low on the down-move we experienced (which happened overnight as so many of our critical moves have) was 1530. So in order for us to retrace 50% from High to low, we are looking to test somewhere in the 1725-1730 range. From there I expect we hold and make our way higher as gold reestablishes itself as the safe haven from world events. 

Before the naysayers get too jumpy, let me just say that the idea that a 50 dollar move today means you missed the move would simply mean you haven't watched gold over the past few months. Two times I have had to bat my eyes twice as I watched gold drop $100+ in a day in these past months. While our moves have been contained of late, a $50 move (or about 3%) is not so significant at a time where European deadlines are likely to contribute to persistent volatility. The move this morning in gold came on fear of absence of a plan... so gold was the fear play. If that is back, what is the contrary scenario? Europe comes up with a comprehensive plan. But what plan doesn't involve the printing of money?

If fiat currencies are going to be devalued, this is a big positive for gold. This bullish gold scenario has played out after we did quantitative easing, and it will happen again if Europe starts printing.

One of the risks to buying gold is that a Euro disaster, or comprehensive Euro solution should they print should lead to devaluing of the Euro. As such, many (as Denis Gartman has often advised) have suggested buying gold in Euro terms as opposed to dollar (sell Euros to fund buying gold so as to gain in both Euro devaluation and gold appreciation). This makes sense, as we have already seen the willingness of traders to use US treasuries as a safety haven. Whether that scenario will replay itself in the event of a Euro meltdown I can't know, but it definitely supports the case for buying gold in Euro terms.

Lastly, I will point out the nearly forgotten number of the day which in a general market would be the top headline. Consumer expectations as measured by the consumer confidence poll was the lowest it has been since March 2009. The fatalist gets scared and discusses how consumption makes up something like 70% of GDP, and that such a number means we're going down. I say, March 2009 was the low of the entire financial disaster move down... so a reading at such a level is more likely bullish as overdone than it is bearish. That being said, if you haven't put on any equity positions I think the risk/reward is rather iffy for doing it overnight. I would rather put my money in gold and risk missing any short term (ie tomorrow when we were scheduled to get this Euro announcement) pop in equities... 

Also, I try to avoid conspiracy theories, but I couldn't help but notice that the "Euro meeting isn't happening (finance ministers as it turns out)" story came out practically on the open for U.S. stocks. While my confidence in Euro leaders is small, I do trust that they were aware that stocks in America opened at this time, and that the open can set the tone for the day. Perhaps they wanted an indication of how market sentiment would handle such news... sick joke... or maybe it just happened to be coincidence. I'll avoid taking any guesses, but it is worth storing this little tidbit somewhere in the back of our minds for a rainy day.