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.
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