When I last wrote a few weeks back, I pointed out that it was not too late to buy gold, despite the tremendous run-up that we had seen. Trading approximately 1770 an ounce, 80 dollars higher than when I made that suggestion, I continue to believe that it is not too late. The gold trade is now entering a new phase, but the macro headwinds should continue to be supportive.
I believe that one of the most difficult concepts to grasp for those not following the gold market regularly is that what dictates gold's performance is often in flux. Over the course of the last year, some people gave up on gold as an investment completely because it sold off in the wake of a very scary macro environment. The so called "fear trade" stopped working. It became clear that people would rather flock to US treasuries than gold as a safe haven. In retrospect, it makes some sense, because the main fear underlying the macro environment was based around the Euro. There is however a flaw in the logic of too many commentators who have argued that gold is dead because it does not react in a clear manner to the amount of perceived fear of global economic disaster. The reality is, that as the Euro has rallied, so too has gold. In the ultimate world economic collapse scenario, most everyone agrees that Europe plunges first, sending contagion throughout the world. Thus, were gold to perform based on the degree of fear in the markets, we should expect for it to trade with inverse correlation to the Euro. It has been the opposite. As gold has rebounded nearly 250 dollars per ounce from its lows just a few months ago, the Euro has only gotten stronger. The EUR/USD Cross which seemingly every currency trader was short below 1.25 is now sitting comfortably at 131.5.
So understanding that gold is not simply a fear indicator, what is it that has led the rally of the past few months? Naturally it is a combination of things. Technically, its breakout above 1630 (the top of the summers range) was supportive. Then came all the QE talk, and then, last week came QE. If the story ended there, then I would agree that maybe the gold up-move has run its course. But there are too many factors that remain supportive to gold, even without QE expectations to help push it higher.
Last week, as expected the Supreme Court in Germany upheld the legality of Germany's participation in the EU bailout funds. This will mean more money printing, which should, overtime, be supportive to the prices of hard assets such as gold. Somewhat paradoxically, such money printing should devalue the Euro, which given the recent trend (in Euro/Gold correlation), should be bearish for gold. However, bailout money and printing have served to make the Euro stronger. The reason as I see it, is that the Euro trade is and has been less about the relative amount of money being printed as it is the perception about the Euro's very existence going forward. While printing money dilutes the value of money already in circulation (and thus should devalue the currency), it increases the likelihood of keeping the European Monetary Union in tact. That has been the focus of the trade, and until that changes, such accommodation should remain supportive for gold.
I believe we are now entering the phase where the driver of gold prices over the next few weeks may be the degree to which violence persists in the Middle East. Months back, I wrote about how my friend had pointed out some articles on debka.com/ highlighting how much turmoil was present in the Middle East despite very limited American media attention. Sadly, it has taken murderous attacks and continued threats to our embassies overseas to get our news cameras to start rolling tape. Following the 2011 overthrow of Egyptian President Hosni Mubarak in February 2011, gold rallied steadily until it flew to make its highs just over 6 months later. Gold will tend to perform with other physical assets, and unfortunately, tensions in the Middle East seem a ways off from peaking. With oil sure to catch a bid with heightening tension, gold is also likely to come along for the ride. Given the speed with which gold prices have moved up in the last five weeks, a minor short term correction would be perfectly normal and healthy. With that being said, the macro environment continues to be supportive for gold, and I expect I will soon be writing about gold breaking and holding above 1800/oz.
Monday, September 17, 2012
Friday, August 31, 2012
Jackson Hole gives gold a jolt..50 dollar bounce off the lows
All eyes this week were on Jackson Hole, awaiting the words of Ben Bernanke. While the usual overblown expectations of an announcement of QE3 were in place, the markets would still likely find satisfaction in the assertion that accomodative policy might be implemented sometime in the near future. There was no announcement of QE3, but Bernanke's words did indeed leave the door open for more use of Fed policy.
As you may recall, the last release of the Fed minutes help juice the markets as Fed governors sounded a far more accomodative tone in the meeting. The head scratcher was that the next morning, Chicago Fed Governor Charles Evans came on CNBC and seemed to downplay the euphoria. The Fed minutes are released weeks after the meeting takes place, and as such, there is always the potential that a shift in data post-meeting would make the minutes themselves a bit misleading. Between the time of the meeting and Mr. Evans' interview, there had been positive economic data releases, which in all likelihood would hurt the case for more easing. So hearing Evans' more reserved tone post-minutes release, created some skepticism in the market. Today however, those same dovish sentiments were reitterated, keeping markets happy.....but it didn't look like that at first glance.
The markets first reaction was to sell off. Gold, which was trading near 1660 pre release, dropped 15 dollars in a matter of minutes. I immediately became confused. As I listened to the reading of Bernanke's speech, it seemed that everything I was hearing was bullish for gold. While I understood that QE was not announced, the dovish tone should have sent gold higher. Give it a few minutes, and that is exactly what happened. Gold reversed off of its low of 45.1 and as I write is trading nearly 50 dollars higher! So what happened?
Bob Pisani gave an explanation that is just so telling of the way markets work today. He explained that there are algorithms that look through documents perusing for buzz words that likely tell the gist of the document. In this case, it seems that those algos correctly saw that there was no QE3, but were unable to account for the general accomadative tone of the letter. So, as people began to hear what I was hearing, and process it, bids came back and the market reversed. This is a classic example of the distortions that can happen in the marketplace when computers act in place of humans. Gold ripped up, recapturing 25 dollars to the upside to about 1670-72, following the human "intervention", before beginning a steady climb to the day's highs.
There is one thing I want to hone in on as to why today's rally only adds to my bullishness. Before the Bernanke release gold was hovering around 1660 and the Euro/USD was trading above 1.26. As I have mentioned in these writings, the trend seems to be that gold tracks the Euro. Macro thoughts aside, it makes sense that gold would track Eur/USD, because a stronger Euro/Dollar cross, means a weaker dollar, which means for gold to maintain equivalent value in dollars, its price must go higher. But here we sit, trading 35 dollars higher in gold and where is the Euro? Lower. To me this means that gold is performing well independently of the currency in which it is priced. I received confirmation on this notion when Dennis Gartman came on TV and said that gold was indeed accelerating in all currency terms.
For those who read this blog with less interest in all of my musings about what is happening and what it might mean, and more interest in "is it too late to get back in" I would say this. It is not too late to get back in. If you believe that gold is a good investment, then the fact that it is about 10% off of the lows should not be discouraging you to buy. The "I want to wait for a pullback" argument is overdone. if there is to be a pullback, there should be significant support down to the 1630 level, 60 dollars lower than here. That is less than 4%. With the way we are seeing real and sustained buying in this market, I would argue your chance of missing that pullback is high. Don't be a penny pincher. If you believe in the gold story, recognize that as it goes up, the bullish outlook only becomes greater. It is not too late to get back in.
Have a great and safe Labor Day weekend
Ben
As you may recall, the last release of the Fed minutes help juice the markets as Fed governors sounded a far more accomodative tone in the meeting. The head scratcher was that the next morning, Chicago Fed Governor Charles Evans came on CNBC and seemed to downplay the euphoria. The Fed minutes are released weeks after the meeting takes place, and as such, there is always the potential that a shift in data post-meeting would make the minutes themselves a bit misleading. Between the time of the meeting and Mr. Evans' interview, there had been positive economic data releases, which in all likelihood would hurt the case for more easing. So hearing Evans' more reserved tone post-minutes release, created some skepticism in the market. Today however, those same dovish sentiments were reitterated, keeping markets happy.....but it didn't look like that at first glance.
The markets first reaction was to sell off. Gold, which was trading near 1660 pre release, dropped 15 dollars in a matter of minutes. I immediately became confused. As I listened to the reading of Bernanke's speech, it seemed that everything I was hearing was bullish for gold. While I understood that QE was not announced, the dovish tone should have sent gold higher. Give it a few minutes, and that is exactly what happened. Gold reversed off of its low of 45.1 and as I write is trading nearly 50 dollars higher! So what happened?
Bob Pisani gave an explanation that is just so telling of the way markets work today. He explained that there are algorithms that look through documents perusing for buzz words that likely tell the gist of the document. In this case, it seems that those algos correctly saw that there was no QE3, but were unable to account for the general accomadative tone of the letter. So, as people began to hear what I was hearing, and process it, bids came back and the market reversed. This is a classic example of the distortions that can happen in the marketplace when computers act in place of humans. Gold ripped up, recapturing 25 dollars to the upside to about 1670-72, following the human "intervention", before beginning a steady climb to the day's highs.
There is one thing I want to hone in on as to why today's rally only adds to my bullishness. Before the Bernanke release gold was hovering around 1660 and the Euro/USD was trading above 1.26. As I have mentioned in these writings, the trend seems to be that gold tracks the Euro. Macro thoughts aside, it makes sense that gold would track Eur/USD, because a stronger Euro/Dollar cross, means a weaker dollar, which means for gold to maintain equivalent value in dollars, its price must go higher. But here we sit, trading 35 dollars higher in gold and where is the Euro? Lower. To me this means that gold is performing well independently of the currency in which it is priced. I received confirmation on this notion when Dennis Gartman came on TV and said that gold was indeed accelerating in all currency terms.
For those who read this blog with less interest in all of my musings about what is happening and what it might mean, and more interest in "is it too late to get back in" I would say this. It is not too late to get back in. If you believe that gold is a good investment, then the fact that it is about 10% off of the lows should not be discouraging you to buy. The "I want to wait for a pullback" argument is overdone. if there is to be a pullback, there should be significant support down to the 1630 level, 60 dollars lower than here. That is less than 4%. With the way we are seeing real and sustained buying in this market, I would argue your chance of missing that pullback is high. Don't be a penny pincher. If you believe in the gold story, recognize that as it goes up, the bullish outlook only becomes greater. It is not too late to get back in.
Have a great and safe Labor Day weekend
Ben
Wednesday, August 22, 2012
Gold is starting to shine; Fed Minutes and The Middle East
What looked like it would be a quiet day changed shortly after the options market close. Sitting inside a late-August like 7 dollar range throughout the day, we awaited Fed minutes release at 2pm. To my surprise, the minutes showed that Fed governors emphasized the potential for use of monetary stimulus in the coming months. Gold rallied on the release, and is now trading comfortably around 1650, where, it hung out for months before dipping into the 1530-1630 range that we broke out of on Monday.This seems to me to mark a material shift, and while I am not sure why it is taking place, it is important that we take note.
_______________________________________________________________________________
Fed Minutes
The thesis I have put forth for many months on this site has been that the likelihood of monetary stimulus from the fed is actually quite low. This thesis proved to be correct despite the big Goldman Sachs call that we would be getting QE in July. The basis for assuming no QE is and has been rather simple.
The first reason is that there is a great deal of debate as to whether or not QE is actually stimulative for the economy. If the evidence does not clearly support it, what would catalyze the fed to move in that way?
The second reason for the no- QE thesis was centered around the idea that the Fed is aware of its dwindled stash of monetary bullets, and thus, would only act to use what little it has left if the economic situation worsened significantly. We can debate the data all we want, but things have not materially worsened, and we have watched the stock market quietly creep to multi-year highs. Why then, with markets holding their own, would the Fed ever choose to act?
I should be clear that to this point, the Fed still has not acted or engaged in any new stimulus; but the last meeting's minutes clearly indicate a signaled increase in the likelihood of such stimulus. In the hour or so that I've had to think about it, the only possible explanation I could come up with for this change in sentiment is that the Fed governors realized that the stock market is coming into some real resistance at these levels, and that they want to keep the uptrend going. Bernanke has often said he views stock market performance as important to the recovery; but whether or not the Fed would go as far as to try to create a catalyst for a technical breakout I do not know (it seems like a bit of a stretch). I should point out that the minutes are from a meeting that took place weeks back, so some of the sentiments of Fed members may have been more accommodative with the stock market at lower levels.
_____________________________________________________________________________
The Middle East
A few weeks back, I mentioned both my discontent and disbelief at the lack of media coverage being dedicated to the tensions in the Middle East. As the Syrian debacle heated up and Saudi troops were being mobilized, all I could hear on the TV set was hackneyed chatter about the next big thing coming out of Apple. What perplexed me about the lack of coverage was the fact that the events of the Arab spring in the previous year were so closely covered, and such important drivers of the market at the time. I felt, and continue to feel that were this coverage to pick up, gold prices would be a beneficiary. Now, we are finally starting to see that media coverage pick up.
CNBC had a number of segments today centered around the topic of the Middle East, in particular whether or not Israel will choose to strike against Iran. Having recently been to Israel, I have a new found appreciation for the unthinkable complexity of the issues behind Middle East tensions. Middle Easterners do not think about nationhood the way Westerners do. Colonialism led to the drawing of borders that had little to no regard for the cultural boundaries amid the geography. As such, it is increasingly hard for someone who is not from the Middle East to recognize the impact of cultural affiliations on a more tribal, or, put less eloquently, "non-nation sub cultural" level. Therefore, I will not try. But I want to highlight a few comments made by some of the guests with respect to the potential for Israel to strike Iran.
The first commentator I heard pointed out that there is rampant inflation and economic woe throughout Iran. He suggested that the likelihood of Israel attacking Iran imminently is very low, because starting a war would simply play into the hands of the Iranian government by giving them a way to unite their people. By his logic, not striking would allow for the continued build of frustration among Iran's populace (due to the economic situation, which can in part be linked back to the government's foreign policy which has led to sanctions) and thus a weakening of support for its government.
Later in the day, a different guest stated that he thought an attack from Israel was highly probable. He reasoned that top Israeli officials believe that were they to engage in war, they would want to do so before the November elections. The logic, as I took it, was that Obama would have no choice politically but to stand behind Israel with the election forthcoming.
Whatever the outcome, there is no surer truth than the fact that there are no quick and easy solutions in the Middle East. The issues and tensions have been quite serious for some time now. The game-changer is that we are starting to see the media hone in on it. If media coverage continues, which I think it will, such tension should be supportive for gold prices.
____________________________________________________________________________
In conclusion, it is becoming harder and harder to see gold moving significantly to the downside. We have broken out above the 1530-1630 range I always mention, and because we were stuck in that range for so long, the breakout becomes all the more meaningful. I would not get ultra-bullish on gold here in the immediate short term, simply for the simple fact that we spent so much time hovering around this 1650 price earlier this year. That consolidation that we saw will make it technically harder to soar higher.... it will probably have to do a little bit of work. That being said, the aforementioned Middle East situation should keep a bid in gold. In my last post I mentioned the importance of the upcoming German ruling on the constitutionality of the Euro bailout funds. In passing Merkel has been supportive of Draghi of late, which is likely part of why market handicappers seem to be betting that the fund's legality will be upheld (Yes, there theoretically should be no connection between an executive's thoughts and a ruling by a court.... but we all know how it really works). Gold continues to trade (lately even more) in step with the Euro. So any more news that is pro-Euro existence, should be supportive for gold prices. Perhaps, as with the stock market, gold will take a little breather, but given both the technical picture and the headwinds surrounding it, gold looks poised to continue moving higher.
_______________________________________________________________________________
Fed Minutes
The thesis I have put forth for many months on this site has been that the likelihood of monetary stimulus from the fed is actually quite low. This thesis proved to be correct despite the big Goldman Sachs call that we would be getting QE in July. The basis for assuming no QE is and has been rather simple.
The first reason is that there is a great deal of debate as to whether or not QE is actually stimulative for the economy. If the evidence does not clearly support it, what would catalyze the fed to move in that way?
The second reason for the no- QE thesis was centered around the idea that the Fed is aware of its dwindled stash of monetary bullets, and thus, would only act to use what little it has left if the economic situation worsened significantly. We can debate the data all we want, but things have not materially worsened, and we have watched the stock market quietly creep to multi-year highs. Why then, with markets holding their own, would the Fed ever choose to act?
I should be clear that to this point, the Fed still has not acted or engaged in any new stimulus; but the last meeting's minutes clearly indicate a signaled increase in the likelihood of such stimulus. In the hour or so that I've had to think about it, the only possible explanation I could come up with for this change in sentiment is that the Fed governors realized that the stock market is coming into some real resistance at these levels, and that they want to keep the uptrend going. Bernanke has often said he views stock market performance as important to the recovery; but whether or not the Fed would go as far as to try to create a catalyst for a technical breakout I do not know (it seems like a bit of a stretch). I should point out that the minutes are from a meeting that took place weeks back, so some of the sentiments of Fed members may have been more accommodative with the stock market at lower levels.
_____________________________________________________________________________
The Middle East
A few weeks back, I mentioned both my discontent and disbelief at the lack of media coverage being dedicated to the tensions in the Middle East. As the Syrian debacle heated up and Saudi troops were being mobilized, all I could hear on the TV set was hackneyed chatter about the next big thing coming out of Apple. What perplexed me about the lack of coverage was the fact that the events of the Arab spring in the previous year were so closely covered, and such important drivers of the market at the time. I felt, and continue to feel that were this coverage to pick up, gold prices would be a beneficiary. Now, we are finally starting to see that media coverage pick up.
CNBC had a number of segments today centered around the topic of the Middle East, in particular whether or not Israel will choose to strike against Iran. Having recently been to Israel, I have a new found appreciation for the unthinkable complexity of the issues behind Middle East tensions. Middle Easterners do not think about nationhood the way Westerners do. Colonialism led to the drawing of borders that had little to no regard for the cultural boundaries amid the geography. As such, it is increasingly hard for someone who is not from the Middle East to recognize the impact of cultural affiliations on a more tribal, or, put less eloquently, "non-nation sub cultural" level. Therefore, I will not try. But I want to highlight a few comments made by some of the guests with respect to the potential for Israel to strike Iran.
The first commentator I heard pointed out that there is rampant inflation and economic woe throughout Iran. He suggested that the likelihood of Israel attacking Iran imminently is very low, because starting a war would simply play into the hands of the Iranian government by giving them a way to unite their people. By his logic, not striking would allow for the continued build of frustration among Iran's populace (due to the economic situation, which can in part be linked back to the government's foreign policy which has led to sanctions) and thus a weakening of support for its government.
Later in the day, a different guest stated that he thought an attack from Israel was highly probable. He reasoned that top Israeli officials believe that were they to engage in war, they would want to do so before the November elections. The logic, as I took it, was that Obama would have no choice politically but to stand behind Israel with the election forthcoming.
Whatever the outcome, there is no surer truth than the fact that there are no quick and easy solutions in the Middle East. The issues and tensions have been quite serious for some time now. The game-changer is that we are starting to see the media hone in on it. If media coverage continues, which I think it will, such tension should be supportive for gold prices.
____________________________________________________________________________
In conclusion, it is becoming harder and harder to see gold moving significantly to the downside. We have broken out above the 1530-1630 range I always mention, and because we were stuck in that range for so long, the breakout becomes all the more meaningful. I would not get ultra-bullish on gold here in the immediate short term, simply for the simple fact that we spent so much time hovering around this 1650 price earlier this year. That consolidation that we saw will make it technically harder to soar higher.... it will probably have to do a little bit of work. That being said, the aforementioned Middle East situation should keep a bid in gold. In my last post I mentioned the importance of the upcoming German ruling on the constitutionality of the Euro bailout funds. In passing Merkel has been supportive of Draghi of late, which is likely part of why market handicappers seem to be betting that the fund's legality will be upheld (Yes, there theoretically should be no connection between an executive's thoughts and a ruling by a court.... but we all know how it really works). Gold continues to trade (lately even more) in step with the Euro. So any more news that is pro-Euro existence, should be supportive for gold prices. Perhaps, as with the stock market, gold will take a little breather, but given both the technical picture and the headwinds surrounding it, gold looks poised to continue moving higher.
Thursday, August 16, 2012
John Corzine, above the law... and gold
Before getting to Corzine, lets look at gold.
John Paulson, whose gold fund has been an utter disaster, and George Soros have both shown in Q2 filings that they are buyers of GLD. They are however buyers of a commodity that has seemed to have no catalyst for the longest of times. While talks of QE3 can fill up the airwaves and help fill our ears during these slow market days, it has all gotten just a little bit old. The real catalyst for movement will likely come down to September 12th.
SEPTEMBER 12th: Mark your calendars.
It is September 12th that the German Constitutional Court will decide on the constitutionality of the creation of a permanent EU bailout fund. Unlike the "European Summits" which have become code word for "meetings in which European leaders will feign unity to keep their cost of funding lower", this is a court ruling. While I am not familiar with the German court system, I would venture to say that the likelihood of our first concrete indication into Europe's future is far more likely to come on September 12th than at the next Euro Summit.
Handicapping the market reactions to such an event is actually incredibly difficult. In theory, approval for a permanent bailout mechanism should stand to mean more money printing is on the horizon, which should devalue the Euro. But, on the other hand, approval of the bailout fund also means that the Euro's chances of surviving increase drastically, which should enable it to catch a bid. I believe that the perceived future of the Euro currency will have a far greater impact than any "money printing" implications. As gold has tended to trade more or less in line with the Euro, it stands to reason that an upholding of the legality of a permanent stability mechanism would actually be good for gold. That is of course, for the short term. Were pandemonium to be unleashed in Europe... bank runs etc... there could be a mass exodus to physical assets, chiefly gold. Still, the likely first move in gold, were the fund to be deemed unconstitutional, would be to the downside.
________________________________________________________________________
Now to Corzine; The New York Times reported this morning that he will not be facing criminal prosecution. It is such an outrage for any human being with a pair of eyes, ears, and a quarter of a brain to accept (without sounding too self absorbed, I do put myself in that category), that I would not even know where to begin writing about it. Zerohedge, as it usually does, has provided a better outlook than I probably could.
http://www.zerohedge.com/news/jon-corzine-will-not-only-not-face-prosectuion-may-be-launching-hedge-fund-imminently
We should not need any personal anecdotes to bring forth the absurdity of this lack of criminal prosecution; but here are a few. As I walked onto the floor every morning during the debacle, I had to hear the stories of honest people who had been in the business for years living in fear about their financial futures. Not just because of potential money lost, but the inability to even trade out of their positions. Options positions can go bad...very bad... in a very short period of time. Part of the reason that you rarely see active traders with positions taking vacations here (at the Nymex in New York) is that positions need to be monitored so closely. It is not like stock or futures trading where you can leave your stops in and leave. As such, these traders were not only exposed to cash losses, but also tremendous risk from being rendered paralyzed with respect to their ability to trade out of their own positions.
How is it that Raj Rajaratnam gets 11 years for taking insider tips, without causing anywhere near the loss/harm to individual traders and investors that Corzine did, and Corzine does not even get prosecuted? Even when something as absurd and criminal (the lack of prosecution is a crime in itself) as this takes place, I try to see both sides. On this one though, I simply can't find how (aside from political contributions and the heavily entrenched old boys club) one could "publicly" justify this lack of action. If you haven't read the zerohedge piece; read it. Hubris has reached all time highs.
Monday, August 6, 2012
The Dog Days of August
In my last writing, over a week ago, I discussed the new found life of call options that had been left for dead during the time that the only outlook for gold seemed to be to the downside. Gold has been bound by an approximately100 dollar range for months (1530-1630). I wrote in my previous post that while there was certainly more bullish sentiment on gold, that the range-bound story would hold until we broke at least above 1635..... We never did. We stalled around 1632 last week, and have yet to push through. While we are now consolidating on the high end of the range, there is little hope for a breakout in the near term.
There is plenty of back and forth (as there should be) about the validity of the jobs report. Whatever the reality however, the perception was that Friday's report was not so bad. Gold struggled on the news, as the pattern (from the last 2 reports) seems to be that a good jobs report means a sell off for gold (and vice versa). But the way in which it took place, served as what I believe to be the nail in the coffin for any excitement in the gold market in the coming weeks. Front month gold option volatility got crushed, plummeting nearly 2% on the day. Today, that volatility came in even more.
As we stand, we are still in the midst of the 100 dollar range, and we now enter the historically slow month of August. Despite what could have been a very momentous market week last week (given the jobs report/ Draghi commentary etc) we moved very little. A seasonally slow month coupled with limited data forthcoming equals a slow August to my mind.
I do see gold having a positive bias to the upside, but I think it is limited. Even if we are to break 1630-1640, we run into 1650 area, where gold had shown significant consolidation before dipping into the aforementioned range. Hopefully some news comes to jolt the market, but for now, we can look forward to a rather uneventful August.
There is plenty of back and forth (as there should be) about the validity of the jobs report. Whatever the reality however, the perception was that Friday's report was not so bad. Gold struggled on the news, as the pattern (from the last 2 reports) seems to be that a good jobs report means a sell off for gold (and vice versa). But the way in which it took place, served as what I believe to be the nail in the coffin for any excitement in the gold market in the coming weeks. Front month gold option volatility got crushed, plummeting nearly 2% on the day. Today, that volatility came in even more.
As we stand, we are still in the midst of the 100 dollar range, and we now enter the historically slow month of August. Despite what could have been a very momentous market week last week (given the jobs report/ Draghi commentary etc) we moved very little. A seasonally slow month coupled with limited data forthcoming equals a slow August to my mind.
I do see gold having a positive bias to the upside, but I think it is limited. Even if we are to break 1630-1640, we run into 1650 area, where gold had shown significant consolidation before dipping into the aforementioned range. Hopefully some news comes to jolt the market, but for now, we can look forward to a rather uneventful August.
Thursday, July 26, 2012
A reason for hope for the gold bulls (settle 1615.1, August Expiration)
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.
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.
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.
Subscribe to:
Posts (Atom)