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.