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.
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