Wednesday, June 27, 2012

Why we now know when its market manipulation and when its real; settle 1578.4

13,000 contracts. That is approximately how many contracts were bought circa 10 am this morning. Gold, which was down about 10 bucks on the day at the time, rallied up from 1566 to make the day's high of 1584.6. It was clear that there was a big buyer, because it happened at a time where no news or major economic data was being released. Other markets did relatively little during the move.

While my call has been that we will hold near these levels and go higher, the price action did not make me anymore bullish. Whether the buyer was short covering or initiating I do not know; but the price action following the buying was disappointing. New buying did not come to the market, as the high was made in an abrupt fashion, and never did we see the day's high retested. In fact, we had trouble even getting back above 1580. Gold never did return to the 1566 level where the buying began, but the lack of follow through was a bit disappointing. 

To put 13,000 contracts in context; we have only traded 111,000 contracts since the open last night. So over 10% of the days volume was traded in a 10-15 minute period which, as mentioned, did not hold any significance. So while the 18 dollar move low to high might seem like a lot, I do not find it to be particularly impressive. On major economic announcements, I have seen orders between six and seven thousand lots cause equal price movement in a matter of seconds. I must admit however, that those fast moves, have all been to the downside. Still, I think today's buying provides an interesting point of reference for understanding how gold trades... and how those other moves are almost certainly a sign of manipulation of price.

Whether short covering or initiating, this was either real purchasing of contracts, or manipulation by someone who had no clue what they were doing (hence the failure in pushing the price drastically). The big difference between this rally and the precipitous drops discussed in previous posts, is that this took place over time. The market was able to absorb 10+% of a day's volume when things were otherwise quiet BECAUSE the buying was spaced out over time. The precipitous drops have all taken place instantly. The 7,000 contracts or so that trade on the drops (I've seen it twice) all trade almost at once. For reference, 7,000 contracts at 1600 carry a total notional value of approximately 1.1 billion dollars. For that kind of notional value in a single trade, you might assume that someone has at least a faint clue as to what they are doing. Either that whale is blown away by the fact that you can do two times as many contracts and get better price levels, or the case for the fact that those sellers WANT to drive the price down becomes all the more strong.

For anyone who has paid close attention to those vast sell-offs I might expect to hear a counter-argument raised. Those sell-offs have come at the times of major economic news. One could argue that at the announcement of major economic news, a bullish or bearish thesis could change on a dime, and there would be panic to get out as quickly as possible.
 Two comments to that argument.

A) You would still be better off to spread the order out over a 1 to 2 minute period
B) Pay attention to when the sell-off (or rally, were it to ever work that way) happens on the mini flash crashes. The sell-off happens before the news is actually out. So in essence, everyone is fooled into thinking the sell off is drastic BECAUSE OF the news that is released. Au Contraire. The moments before news is released is when everyone gets flat and pulls their orders. Hence, the easiest time to rip through a market with the least amount of size.

I have made these arguments before about the way the manipulators smash gold and why they do it when they do it. Today's example of big buying (2x the size) not moving the markets nearly as much (particularly when accounting for order size and relative daily volumes) only bolsters the argument that the flash sell offs are pure market manipulation.

Thursday, June 21, 2012

Everything happened the way we would expect.... a day late

As we watched gold, silver, and everything but the dollar, bonds, and nat gas plunge today, one had to wonder; Why didn't this happen yesterday? Sure the market jerked around a bit following the announcement of no QE, but overall the market's reaction was rather tepid. Settling 1615 yesterday, we settled approximately 50 dollars lower today. To be fair, gold was nearly 10 dollars lower after yesterday's settlements came out, but either way you slice it, today was rough. So where shall we go from here?

After the close I was talking with a friend who trades silver options. He asked me what I thought (silver got pummeled, down over $1.5 today) and I told him I didn't think the selling (in gold) would last long. My reason? We have seen gold hold near the 1530 levels the last 3 times it has tested, each time with strong buying coming in to aid the market. The lowest we got since the last time we reached the 1530 area was 1557, which we hit in the overnight session. Trading in the mid 60s now, with all the support we have seen, the risk/reward seems far more favorable to the upside. I would not be surprised to see us go back and test the 30 level, but the perception surrounding gold (which I believe has generally gotten more positive among investors) would have to be worse for us to see a breakdown below such strong support.

Despite my conviction about these support levels being the real deal, I think the comment my friend made to me about silver puts is more telling. He pointed out that each time we have gone down to these levels previously, he has been unable to buy downside puts without paying up big. Today, he said, he had no problem getting equivalent puts. Silver is not gold granted, but it was not as if the puts in gold were completely untouchable either.. (December 1300 puts went cheap about 500 x, though they went on the screen in 2 seconds... not a whole lot of time to react). I think it is important to be careful not to assume too much about direction from the options market. But when you see the skew not performing as one might expect on an extreme move (particularly near a low or high) I think it is noteworthy. I have pointed out a number of times that the day before gold made its highs last September you started to see the calls (while we were up) getting offered. There are people in the know who trade these option markets, and they are thinly traded enough that the big players with "inside knowledge" might not be bidding puts up as usual for a reason. Gold and silver don't need QE to go up, and to use the "no QE" as the reason we will capitulate would to my mind, be a mistake. Meaty delta calls in the front months in Gold (July and August; July expiring next week) are actually trading at lower volatility levels than the at the moneys.... something we have not seen for some time. Expect that relationship to end soon, particularly with anything but a breakdown.

Wednesday, June 20, 2012

Quick Pre-Fed Announcement Run down

We are currently hovering around the 1600 level, over 20 dollars below yesterday's settle. It is a bit confusing to me that I keep hearing that the consensus is that QE WILL be announced, yet most people I talk to seem to think that it won't. I wrote last Friday that barring a disaster in Greece, I would not expect to see QE today. Since Greek elections went well from a market perspective, I continue to think we will not see QE.

I have proposed that the Fed will wait for worse times to do QE if they are to do it at all. But there is an even simpler reason to think that it won't happen. Bernanke does not want to surprise people. That's not the game he's in. Bernanke's generally calm and professorial disposition is important for the post he holds. When markets are easily spooked, it generates volatility, which tends to limit the degree to which people feel comfortable taking risk. Having not given hints for the possibility of QE (even though the market expected him too), Bernanke would be in essence telling people that he was capable of surprising them at any time. To do that, would ruin his ability to serve as a calming agent for markets. I do not know about whether operation twist will be extended, but QE to my mind is an extremely unlikely. Big announcements like this usually provide the opportunity for the manipulators to smash the gold market right before the announcement when liquidity dries up. That is what I anticipate as the likely move. If, however, it gaps up (regardless of what the announcement is) expect gold to break out above 1635, which has been resistance of late.


Sunday, June 17, 2012

Are the algos painting the tape to create more volatility?

As it looks like the Greek elections will keep unrest and panic at the way side at least temporarily, gold seems unsure about what to do with itself. Opening at 1630 (just above settle from Friday), only to drop to a low of 1606.9. With a high of 1631.3, we have just under a 25 dollar range.... and its only 9pm on Sunday. I was told it was a quick drop and snap-back. We are becoming more accustomed to these moves where we see rapid drops and then buybacks. It seems to me that these snap-back moves after fast and precipitous drops all take place at night. When the quick drops happen during the day, you rarely see the snap-back so fast. I don't think this is co-incidence.

Gold is not having an identity crisis. A wide range for early Sunday night is not indicative of the market's ambivalence as to whether or not gold is a safe haven asset. What is good for fiat currency should be bad for gold, until it can be substituted for it one day. With the conservatives getting the nod in Greece, for the moment, the Euro is safe. While it is true that a strong Euro (and relatively weaker dollar) is supportive in real dollar terms for gold, what is good for fiat currency is generally bearish for gold. But the obvious market manipulation we are seeing before our eyes tells far more than any macro trend in day to day gold trading.

How do the futures algos work and make money? I wish I knew. I do know that many have tried and failed at that game, but I don't know what it is that makes the winners win. What we can see however is that algos benefit from market volatility. If an algo benefits from more market volatility, why not paint the tape and show a wider range.... adding to the "uncertainty" of what this quandary we call gold is really all about. That should almost certainly ensure even more wide ranges during tomorrows trading. When there is movement, however they do it, the algos win. So I ask, if there is almost no volume around this time of night before London opens, why a quick sell off and snap back? Simple. Someone who wants to paint the tape does so when its cheapest, during times of low volume. On low volume, you can easily push the price both ways. Sell it down on relatively light volume, buy it back on relatively light volume, risk far less than you will benefit from a more volatile market the next day. So tomorrow, when the "is it a safe haven?" commentary hits the news wires, remember, they are playing directly into the hands of algo operators. If people don't understand this stupid commodity, well then ascribing a "fair value" should be all the more difficult. The more price movement, the more the algorithms can profit, the more stops they can try to run, and the more volatile gold gets. Let's be smarter than the mainstream media. It is the players in the market and the way they operate; not "the global picture" that really dictates the way gold trades.


Friday, June 15, 2012

No small weekend ahead- settle approx 1628.1

Greece Greece Greece. The Greek election is this weekend. Unlike the elections we are used to, there is no guaranteed definitive outcome. In fact, from those I have spoken with, it sounds like a non-majority/ non result is the most likely scenario. The one scenario that would likely spook the markets most would be a victory for the Syriza party, which has openly stated they will not cooperate with austerity measures.


While it seems sensible to consider the political implications of the results for Europe's future when trading, I would emphasize the importance of the reaction of the Greek people. Over the past few years I have noticed that markets have a tendency to become increasingly volatile when violence in Greece is shown on TV. You won't find fundamental or technical analysts talking about it, but if the elections lead to violence, and that hits our TV screens, it might well accentuate whatever moves we are seeing. If chaos is to really set in, then accelerated bank runs become a near inevitability. If this scenario plays out, markets would likely take a nose dive. 

What happens this weekend may have implications for the Fed language that we hear later in the week. As readers will remember, we have been looking ahead to this coming weekend and week for some time now. Many, including Goldman (which has been calling it for months) think that the Fed will announce QE3 this week. If the elections lead to a poor market reaction, the likelihood of QE3 increases significantly. Barring a strong sell off on Monday due to a Greek fallout, I believe that people are over estimating the likelihood QE3. As I have said here before, the Fed has a smaller toolbox than it once did. Unless we see a new yearly low in the stock market (over 60 S&P handles lower), I think they will keep what little they have left in the way of policy stashed away for a rainy day.

Gold has become incredibly difficult to handicap of late. As those who have read my blog before know, I abhor financial journalists' unwillingness to take a stand on the topics they report on. As just mentioned, I will take what I believe to be the unpopular view at this point and say that we will not see QE3 this week. However, I simply can't take a directional view on gold. We have seen swaths of divergence between equities and gold in the last couple weeks, but there has not been any consistency to that divergence. The support we have seen hold in the mid 1500s has shown that there is strong demand for buying the dips. However, trading 100 dollars higher than the recent lows of 1527, there is a lot of room to the downside. If you are buying for your portfolio however, just buy it and forget about it for a while. The money printing going on in the world will not stop, and nor will the deterioration of faith in fiat currency.

Options Commentary

In the options world, we are running front month volatility (expiring in 8 trading days) at 20% (a month further out approximately 21%). While vol was out earlier today, we saw gold volatility get hit hard in the last hour (1 pm eastern now). Implied volatility has been higher than realized vol, but I think that is justified. With a front month break even at just over 20 dollars, you are losing on erosion most days. But bare in mind that we moved 60+ dollars on the Friday we received the bad jobs data. With the events forthcoming, I think it makes sense to remain long vol. The events (Fed announcements/ the elections, which have big implications for the currency markets) tend to make the gold markets move big.


I'm off to Mohegan Sun with some friends to play poker this evening. I hope everyone has a great weekend ahead of what is sure to be an exciting upcoming market week.  Please post comments on thoughts you have, questions or ideas about what is going on in the market, or thoughts on what I can do to make the blog better.

All the best,

Ben

Friday, June 8, 2012

A lot about nothing? Settle 1691.4

As I often point out in this blog, nobody effects the gold market like Bernanke. Yesterday morning, following Janet Yellen's comments from the night before, many were expecting hints about pending QE. I must admit, I was in the camp of the disappointed. Were our expectations too lofty?

With the benefit of hindsight, I suppose yes is the answer. But in looking back, I think the expectation of a QE hint, or slightly more dovish language in his speech was reasonable. The counter commentary was that this was not an FOMC announcement, it was simply a speech. A stoic Fed Chairman would not give away secrets or hints, as that would be political. Ok I get that. But lets be real, it's a political job at this point. The stock market has already had a good chunk of its ear bitten off, and serious risk looms across the globe in the coming weeks. So it made sense to me. Hint at QE, and if the stock market prices it in, doing it might not actually be necessary. Because that is after all what QE has become; a tool to make stocks go higher. It doesn't spur lending or borrowing. Fortunately I didn't take too many classical economic theory classes in school, because such classical assumptions are meaningless if not misleading in a zero interest rate environment. I do however know that banks make money by borrowing short, and lending long. Well, with a yield curve as flat as a coffee table top, I am pretty sure we do not have to ask questions about why QE doesn't work.... at least that is, doesn't work to stimulate the economy.

Gold, as has happened in the past, sold off violently when there was no hint at QE in the Fed Chairman's remarks. Shortly after the number stops got triggered around 1615 causing gold to sell off in a single print all the way down to 1603. We then proceeded to make a low of 1579.6, rallying all the way back up to 1593.0. Then, in the overnight session, we had another sweep in the futures. This time, from we dropped nearly 25 dollars in one fell swoop down to 1556. This took place at around 10:30 pm, and while I was not watching it, I was told that it was a 7000 lot order (a relatively huge order... particularly at that illiquid time of night) that sent gold tumbling. Gold recovered from this sweep, and closed higher by just over 3 bucks on the day. In markets where you see consecutive prints 16 dollars away and 25 dollars away from each other, the risk of putting on positions becomes far greater.

Finally, I want to point your attention to the below chart. It is a weekly chart of Gold (August futures). Notice how tight of a range we've been in? With all the intra-day swings we have seen, it is easy to forget that gold has not really moved at all. Sometimes when your so caught up in the day to day life can seem a little crazy. On longer term chart however, we can see that gold is consolidating.


Previous posts mentioned how gold had generally been range bound between 1530 and 1599, and needed to break one way. It looked like we had broken out to the upside last Friday on the bad employment news, but this Thursday's sell off brought us right back into the top of that range.We are seeing solid daily ranges, but looking at the weekly closes of late, we see that we haven't moved all that much.

Have a great weekend

Ben



Friday, June 1, 2012

RALLLLLLLLLY (settle 1622.1)- Terrible Employment data

69k! The low end of the consensus range for today's ever important non-farm payroll number was for adding 95,000 jobs. Needless to say this was a terrible miss. Before the number at 8:30, gold was trading down near 1550, and the S&P was down 15 handles. Weak China data over night was the catalyst for the drop during the overnight session. It seemed logical to me, that given that the S&Ps and gold were down overnight, they might react similarly to the employment data; but this was not to be.

After the number, the S&Ps quickly dropped 10+ handles, while gold began to rally. The bids kept flowing in, and low to high, gold rebounded nearly 87 dollars! In these writings, I am often cautious to ensure that I do not over-react to a one day move, regardless of direction. Today however, I must make an exception. This could be a game changer. But it is not just the magnitude of the rally that changes the gold story so much. Let's take a look at some of the dynamics of today's trading, and why it is all so significant.

1) As of this writing (3:15 PM), front month gold futures (August) have traded 280,000+ contracts. As of this morning's option pit open (8:20 am) only 51,000 contracts have traded. So, nearly 230,000 contracts have traded, almost all on what has been on a sustained up move. This is strong volume, and adds conviction to this move up.

2) This is the most significant stock market/ Gold divergence that we have seen in some time. Recently, I became bearish of gold. My thesis was simple. The stock market is showing no fight, and will keep selling off (correct so far). While gold has shown fits and spurts of negative correlation with the stock market, none has been sustained. As such, I believed that as people sold the stock market, they would sell gold too. Today, may be the first indication that this is not taking place. With gold up 60 and the S&Ps down over 32 this is divergence in the greatest form.

3) The S&P is now below its 200 day moving average and the Dow is negative on the year. 
If negative correlation is to persist between stocks and gold, closing below the 200 day DMA is bearish for the stock market, and consequently positive for gold.

4) We have broken out of the 1530-1599 range that we have been trading in for the last few weeks. Every time we went down into the 1530 area, it was met with serious support. 1581 had served as a big number for a while, but getting through 1600 became the next big challenge. Today, we broke through, and followed through in a big way.


I have written for the past few weeks, as we were range bound, stating that until we broke out of the range, it didn't make sense to play. We broke out. We broke out higher. If you have been on the sidelines because gold was "losing its luster", it's time to get back in. The metal looks like it may have just gotten its shine back.

Have a great weekend

-Ben