It has been a while since I have written, and frankly it is because I felt that the last week had very little of consequence to write about. The daily reports I read about gold had essentially admitted that they too had very little to say. The last few days however, have changed all that. Gold is starting to get a bit of its luster back.
Gold has been range bound for months. While it has played both sides of the range, Everyone feared the downside far more than the upside. Having tested multi-year lows around 1525 multiple times, a break below 1525 would almost certainly mean an extension of selling. Each time gold tested that low, strong buying came in to support it. While gold longs could take comfort in the strong buying, the nervousness of what would happen IF gold were to break was only exacerbated. If a serious support level is broken, then it becomes major resistance. As such, gold's inability to follow through on the upside and put together any sustained rallies kept concerns about a gold collapse high. But something has materially changed. You need look no further than the gold options market to see that.
The price of puts relative to calls (put skew) has been high for weeks. Volatility only seemed to perform when gold moved down. There is no greater example of that then the day of the poor jobs report that Gold rallied more than it had in years (50+ dollars) and gold options were offered. This implies that gold players don't view a dramatic up move as indicative that movement will continue (When there is a lot of movement/volatility, options go up in value. The fact that the price of options did not go up as gold had a drastic move, shows the directional bias of the market. When we would sell off even twenty dollars however, options (puts particularly) would be bid to the moon). ..... But that changed this week.
As we began to rally, we started to see call options get bid. As I said to a friend, I had forgotten that calls could get bid it had been so long. Not only did skew go out (calls get bid relative to puts) but volatility moved. I can (and often poorly of late) speculate as to gold's direction based on technicals and hearsay; but the options are telling us something important. That being said, I still think we need to trade through 1635 (a break out of the range) to become bullish long term. The other important thing is to see that gold not become so correlated with the Euro. They have traded tightly of late. While a Mario Draghi comment that really adds nothing excited the market and the Euro today (short cover rally in the Euro because everyone is short) might have helped give gold a jolt, the long term gold bull story is based on the collapse of fiat currency, not its stability. If we can break through and hold just 30 dollars higher (approx 2%) and we start to see a breakdown in Euro/Gold correlation, then we will know that the gold bull is back to stay.
Thursday, July 26, 2012
Tuesday, July 17, 2012
So QE3 is coming?
Last week, BTIG's Dan Greenhaus pointed out on air that the Fed minutes were more dovish than the market had interpreted. He posited that following the market's unenthusiastic reaction to the Fed minutes, his team did some deeper reading, and found that there was more pro-stimulus sentiment among Fed governors than met the eye. Today Bernanke spoke, and the market reaction was rather interesting. Initially markets, led by gold (equities followed) sold off. Then, as Bernanke began to acknowledge just how difficult market conditions are, markets found their way back. As I write, the S&P, which had gone negative about 6 handles, is now up 10. So perhaps the market is starting to see what Greenhaus saw last week. It may seem crazy, but that is how this market works. The worse the perceived economic news, the better for markets, because the more bad news, the greater the likelihood that QE3 will be initiated.
Be very careful to take the market's short term delight with a strong grain of salt.
If you watched his testimony today, it becomes quite clear that the Fed has not made up its mind as of yet as to whether or not it will act. Bernanke had some very intriguing Q&A, particularly with the likes of Bob Corker and Chuck Schumer. Schumer told Bernanke not to expect anything to get done in congress, and thus, to get to work on his own. Corker questioned Bernanke as to why he was not more critical of congress, and did not stand up to them more. All else aside, it became clear that congresspeople have accepted their own ineptitude. Bernanke did however say explicitly that were sufficient action to be taken by congress to help bolster the economy, the Fed would be less likely to come to action.
We have, for good reason, become very skeptical of anyone we see with a microphone who sits in front of congress. Bernanke however, has been pretty consistent and straightforward (regardless of what you think about the job he has done or the job he has). I think it is entirely possible, and even likely, that the Fed has not made up its mind. He made it clear today that policy action is possible in the future, but he never denied that in the past. Its a lot about nothing, especially considering there is limited evidence that QE3 will actually do anything to boost the economy. More liquidity does not mean more economic activity.
Fortunately bank earnings have given the stock market a real reason to be happy. But complacency is simply too high in this market. The mere fact that the bad news = good news scenario is how market participants are thinking tells us that we are in denial. Those who watched the Warren Buffet interview last week heard his pessimism, as he blatantly stated that things have gotten materially worse in the last 6 weeks in the Europe. He was also not as "gung-ho Go America!" as he usually is. Buffet has probably been the economy's best cheerleader since the crisis began in '08. To ignore his shift in tone (all we do is listen when its positive) simply highlights collective investor denial. Europe somehow manages to keep muddling through, but it is past the point of return. The bid for the dollar will remain in this market as the inevitable doom sets in over Europe, sending equities lower. This market is simply too complacent, trading at 1357 (S&P) right now. Let's take a look back in a month, I think we'll be lower.
Be very careful to take the market's short term delight with a strong grain of salt.
If you watched his testimony today, it becomes quite clear that the Fed has not made up its mind as of yet as to whether or not it will act. Bernanke had some very intriguing Q&A, particularly with the likes of Bob Corker and Chuck Schumer. Schumer told Bernanke not to expect anything to get done in congress, and thus, to get to work on his own. Corker questioned Bernanke as to why he was not more critical of congress, and did not stand up to them more. All else aside, it became clear that congresspeople have accepted their own ineptitude. Bernanke did however say explicitly that were sufficient action to be taken by congress to help bolster the economy, the Fed would be less likely to come to action.
We have, for good reason, become very skeptical of anyone we see with a microphone who sits in front of congress. Bernanke however, has been pretty consistent and straightforward (regardless of what you think about the job he has done or the job he has). I think it is entirely possible, and even likely, that the Fed has not made up its mind. He made it clear today that policy action is possible in the future, but he never denied that in the past. Its a lot about nothing, especially considering there is limited evidence that QE3 will actually do anything to boost the economy. More liquidity does not mean more economic activity.
Fortunately bank earnings have given the stock market a real reason to be happy. But complacency is simply too high in this market. The mere fact that the bad news = good news scenario is how market participants are thinking tells us that we are in denial. Those who watched the Warren Buffet interview last week heard his pessimism, as he blatantly stated that things have gotten materially worse in the last 6 weeks in the Europe. He was also not as "gung-ho Go America!" as he usually is. Buffet has probably been the economy's best cheerleader since the crisis began in '08. To ignore his shift in tone (all we do is listen when its positive) simply highlights collective investor denial. Europe somehow manages to keep muddling through, but it is past the point of return. The bid for the dollar will remain in this market as the inevitable doom sets in over Europe, sending equities lower. This market is simply too complacent, trading at 1357 (S&P) right now. Let's take a look back in a month, I think we'll be lower.
Wednesday, July 11, 2012
Pending Fed Minutes
The markets seem to be nothing but disappointed recently with Fed announcements and minutes. The pundits seem to talk about the disappointment that we don't get QE. So, might we see "hints" in the language?
If you want to take a punt (with gold) I would suggest the long side. There are a few reasons
1) While I still don't understand why the Fed would do QE with the stock market where it is, if they are to do it, they might provide hints that it will come soon. The Fed does not want to appear to be political, and waiting to do QE....say close to November, might be seen as collusion between a supposedly "independent" Fed and the Obama administration. I don't think they will instate QE, but in the minutes, they might make it clear that there is a possibility to do it at the next Fed meeting, assuming things get worse.
2) My friend, who was watching the bonds, pointed out that the 10 year yield dropped 5 basis points in 1 print about an hour ago (this means they were buying hte bonds). Quantitative easing, or the buying of bonds/financial assets further out on the curve, is bullish for bonds (moving yields lower). This unusual action could be indicative of something to come soon.
3) Yesterday, when gold gave up all of its gains and then some, the metal held, and rallied back to settlement. We sit now down only 3 dollars from yesterdays settle (we had been as many as 15 dollars lower). If a market manipulator was trying to smash gold, they would've likely used the momentum on the down move to stop out all of the longs.
If I were to try to hedge myself, I couldn't pick a worse time. The market reaction to these numbers are about as unpredictable as it gets, but if there is to be an extreme move in either direction, up is more likely.
-Ben
If you want to take a punt (with gold) I would suggest the long side. There are a few reasons
1) While I still don't understand why the Fed would do QE with the stock market where it is, if they are to do it, they might provide hints that it will come soon. The Fed does not want to appear to be political, and waiting to do QE....say close to November, might be seen as collusion between a supposedly "independent" Fed and the Obama administration. I don't think they will instate QE, but in the minutes, they might make it clear that there is a possibility to do it at the next Fed meeting, assuming things get worse.
2) My friend, who was watching the bonds, pointed out that the 10 year yield dropped 5 basis points in 1 print about an hour ago (this means they were buying hte bonds). Quantitative easing, or the buying of bonds/financial assets further out on the curve, is bullish for bonds (moving yields lower). This unusual action could be indicative of something to come soon.
3) Yesterday, when gold gave up all of its gains and then some, the metal held, and rallied back to settlement. We sit now down only 3 dollars from yesterdays settle (we had been as many as 15 dollars lower). If a market manipulator was trying to smash gold, they would've likely used the momentum on the down move to stop out all of the longs.
If I were to try to hedge myself, I couldn't pick a worse time. The market reaction to these numbers are about as unpredictable as it gets, but if there is to be an extreme move in either direction, up is more likely.
-Ben
Friday, July 6, 2012
Another disappointing jobs number-brief analysis
Before getting into the jobs number, lets take a quick look at gold. As someone who spends a significant portion of his life watching the gold futures ladder, I must say, my life is rather boring. To be fair, on a day to day basis, we have seen some pretty significant moves. One day we will be up 30 bucks, the next down the same. Last jobs report we moved over fifty dollars. Today, gold spiked 10 dollars after the disappointing jobs report was released, only to give back the gains. It is as if there is a rule that come Friday, no matter what has transpired during the week, gold needs to settle somewhere near 1590.
Turning to the employment report. A somewhat disappointing 80,000 non-farm jobs were added in the month of June. The unemployment rate remains consistent at 8.2%, while average hourly earnings ticked up, as did average hours worked per week (from 34.4 to 34.5). A mere tenth of an hour (or 6 minutes for those who don't like to do decimals of hours) probably does not seem like much, but we should at least consider its meaning. If there are approximately 100 million people in the workforce, and the number of hours worked by already-employed people increases by approximately .3% (.1/34.5) then effectively 300,000 or so jobs become unneeded. To do the simple math, .3% of 100 million is 300,000, could you imagine if you just took the time in hours added per work-week and turned them into jobs?
Yes it is true, the world does not work like that. If adding to the workload of existing workers instead of hiring is the choice of employers, than things will be better for a few, but worse for many. I do not want to try to draw too many conclusions from these reports, but I think it is important to focus on hours worked far more than we tend to.
All the best,
Ben
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