Tuesday, March 13, 2012

Another Fed announcement passed... let's take notice (gold settle 1694.2)

With Bernanke so commonly featured in the public spotlight, it is hardly surprising when we hear that nothing new of note is brought up during an FOMC announcement. By the time we get to hearing about "keeping rates unchanged for an extended period of time" we have already had the privilege of viewing hours of congressional testimony from Big Ben. It has almost become comical in a sense, with colleagues constantly joking "O I wonder if they'll raise rates" (wink wink) as if the Fed would try to catch an already fragile investor psyche off guard. Indeed their may be some value in scratching for hints about future action due to change in language used in the announcement. Still, it would seem that such fine tooth combing of language is indicative of the fact that there might not be a whole lot of new information in these reports. As such, it only seems logical that they shouldn't move the markets a great deal. But they do.

The impact seems to be notably in gold. I was talking with a colleague this morning and discussing how amazing it is that gold seems to sell off so violently after these announcements, even when nothing has been said. I thought maybe today would be different, but the pattern of sharp sell off on no change persisted. On a very fundamental level, one could argue that no change means no hint of qe3, which means less creation of money, which is bad for gold. Be that as it may, markets tend to price in information that is generally considered known even if it has yet to come to bare. So if for instance qe3 was an expectation, an FOMC announcement that sounded like the last would be significant, because it didn't give the market what it anticipated. But to make the argument that no qe3 causes a sell off, one would also have to suggest that there is some degree of expectation of it at this time.

My general sense of sentiment is that very few people actually expect any qe3 in the short term. With the good economic data of late, the Fed is not desperate to provide stimulus to the market. Perception dictates a great deal of what goes on in the markets, and if perception is relatively positive right now, why would the Fed decide to bring on another round of qe3? The Fed can't lower interest rates anymore, and their bag of tricks is not as vast as it once was. It seems illogical to me that with fewer weapons at its disposal, that the Fed will not choose wisely as to when to take action. This notion is hardly groundbreaking. In fact, I think 90% of traders/money managers would agree. That is why I simply don't think that the "they didn't announce qe3" theory holds any weight in explaining why gold sells off (why did equities go higher after the announcement?). It is anyone's guess as to what dynamics are at work in these sell-offs, but I have seen it enough times to feel like being anything but flat or short pre-announcement is a dangerous game.

Friday, March 9, 2012

A week later... and it doesn't look like we've crashed

As I write on this Friday, we're trading 1710. Following an in-line employment report this morning gold began selling off. We dropped from near 1700 all the way down to 1677, which, not coincidentally is approximately the 200 day moving average. The Euro was getting crushed, and remained depressed while gold rallied 37 dollars to its high. What can we take from the last week?

While we settled below the 200 DMA on Wednesday, it appears that gold is poised to hold these levels. Following our first medium sized 2 day correction of the year in the stock market, we are seeing that American markets are by and large holding their ground. Unlike the last time we had 100+ sell-offs in a day, gold has not spun out of control to the downside. The bottom line is, we are seeing real buying on the dips.

I still see the story as rather unchanged. The sentiment became correctly bearish as gold drifted higher on its way up to 1800 but stalled and showed no ability to get through. I think we will look to go back up to 1800 in the next few weeks, as for now it seems the likely next test will be on the upside, as it appears it failed to break down here. The never say anything pundits will continue to warn that we are "due for a pullback". They remind me of the people who say you should quit while your ahead in a game where you clearly have a winning edge. The trend in gold and equities is in tact to the upside. Given these underpinnings, the case for 1800 gold is more compelling than the arguments for 1600.

Thursday, March 1, 2012

Gold to Crash? Not this time

After a 100+ dollar drop yesterday, everyone started to write off gold. A "not dovish enough" press  conference from Big Ben and everyone thinks that QE is off the table, and gold loses its luster. Even Dennis Gartman, whose  call on gold last big drop was completely dead on, has joined the gold bashing party. But I don't see the follow through on the sell off, a few simple reasons.

As has been discussed in this blog before, the gold market can get pushed around easily by momentum algorithms. When the momentum is unidirectional, the tendency is to see exaggerated moves, simply because the risk reward is not sufficient to bet against it. Gold failed to get to 1800, and had looked tired in the 1780-1790 range. But before assuming that that begets the beginning of a significant downtrend, take a look at the stock market. The stock market has bounced around for the last week or so, relatively unchanged. And does the stock market look weak? While everyone is waiting for the pullback, we seem to find a way to hold in. If gold can begin to consolidate, for the next few days, it stands to show that yesterday may be an anomaly in an otherwise upward trend.

If we close below 1688 in the next few days, then the crash scenario might be in play. But we saw gold bounce strongly off of its lows yesterday (now over 25 dollars higher), and volatility is starting to get hit. Even with front month volatility elevated from before the 100 dollar move, at approximately 17% it is not pricing in a dramatic move in either direction.  This morning, the dealers were buying fences (buying call/ selling put). I interpret this just a day after a day like yesterday to be indicative of strength, or at least not weakness, for gold in the upcoming days.