Gold Update

It has been a long time since I've written about gold and the gold options market. I transitioned a few months back from trading gold to cotton options. Cotton has been flying higher in the last few weeks which has led to some exciting trading. I did not however give up on paying attention to, nor did I stop talking to people about the gold market. While I would not go so far as to say the gold market is exciting right now, there is a lot going on in the macro sense for all market participants to be considering.

I will start with a brief vignette that I think tells the story about what gold has become. In the mornings, I hand out technical charts to some of our traders. I handed my friend, who trades gold, three technical sheets; a chart with analysis for gold, silver and the S &P. He had been away for a week, so I figured he'd be curious to see how the technical picture had changed. But I noticed, that he passed over the gold sheet and went right to looking at the chart and targets for the S&P. I started laughing and asked him if he realized what he had just done. We had a good old fashioned nerdy laugh together, because we found it rather amusing that a gold options (volatility) trader was more curious about the stock market price action than he was that of gold. "It's funny, but this is what matters more" he said.

          

Intuitively, I don't see a tremendously strong correlation between gold and the stock market in terms of price. It is true that while the stock market (the Dow has, and the S&P probably will soon) is making all time highs gold has been drifting lower. So while the two have diverged on the longer term chart, one's daily performance is not predictive of the other's. A big up day for the stock market doesn't necessarily mean bad things for gold, and vice versa. Thus, my friend was not looking at the S&P chart to try to determine gold's direction, but rather the likely volatility implications.

The implied volatility in the stock market is largely a function of the stock market's direction. Investors are generally long stocks, so their risk is to the downside. As such, investors will buy puts as a way to protect that downside. When the market drifts higher, and things seem relatively calm, the demand to pay up for puts goes down. Writing covered calls (selling call options against the stock you are long) is also an attractive strategy for investors who are looking for income in their portfolios. Covered call writers (sellers)collect premium from the options they sell while foregoing upside on the stock they own above the strike of the option they sell.  Both widespread lack of interest in put buying and widespread interest in selling calls creates a situation where the demand for options is low, and the desire to sell them is high. High supply, and low demand equals lower prices. Lower options prices, is another way of saying we are in an environment of low implied volatility.

It is not hard to understand how we ended up here. With a government policy that has been pro accommodative policy (QE, "extended period of low interest rate" language) investors can justifiably feel that there is an implicit floor in the market. For even if markets fall off, we have all been given reason to believe that government will step in to keep stock prices higher. This helps to explain the lack of interest in wasting our precious dollars on buying downside protection. As for the selling of calls; we live in an environment of low interest rates. Income starved investors need a place to go for yield, and that place definitely isn't the bond market. It is why a friend of mine, to my mind, accurately pointed out that the structured products business  should remain robust as long as people cannot find good alternatives to collect income in their portfolios. So the environment is ripe for call selling and "not put buying". So how does this effect gold options and why are the two correlated?

Admittedly, I don't have a good theory from a fundamental perspective as to why this correlation between gold and equity option pricing exists. From a trading perspective, noticing and understanding how these patterns behave is generally more important than justifying why the pattern is what it is. One could look to open interest as a good starting point for understanding the change in volatility. While February open interest in COMEX gold futures is down 6% compared to last year, CME S&P e-mini open interest is up  nearly 12 %; so that would not seem to tell us much (http://www.cmegroup.com/wrappedpages/web_monthly_report/Web_OI_Report_CMEG.pdf).

You could also consider that GLD (gold ETF) has grown so vastly in popularity that gold has almost become more of an equity than it has a commodity in terms of its options behavior. In other words, investors who use the GLD  would have similar motives from an options perspective as a stock market investor would. I believe that would be an incorrect conclusion however, because however true or untrue it may be,  many investors still consider gold to be a hedge against their portfolio. As such, to hedge GLD holdings in a portfolio, would be hedging a hedge, which makes no logical sense. Perhaps gold is traded as if it is a currency now, and currencies generally trade at much lower levels of volatility than traditional commodities. But whatever the reason might be in intellectual circles, I believe there is a market based reason that explains why volatility remains low in these markets.

My same friend who looked at the S&P technical sheet first, pointed out to me that there are programs that look to buy and sell gold at certain levels throughout the day. They represent a large enough portion of the market that their sales can push the market lower on a short term basis, and their buys can push the market higher. Who would do this, and what is the point?

With volatility at these levels, it takes a lot less movement to break even on owning an option than it has in the past. If you own 100 at the money calls in gold that expire in about a month and a half; and you sold 50 futures to hedge out the directional risk of your position, you could move less than 12 dollars daily to break even on your options. This breakeven analysis is simply a way of understanding the amount of movement you would need to hedge the gamma from your options to cover the options' daily erosion. This might seem extremely low, but we do not move 12 dollars (open to close) enough to make buying at the money options and hedging at the end of the day an obviously profitable strategy. However, that does not mean that owning these options cannot be profitable; it is simply a function of when you chose to do your hedging.

In a market like cotton, if you are long gamma (long options, such that you get longer delta when you go higher and shorter delta when the market goes lower) it is generally unadvisable to hedge that gamma aggressively throughout the day. Too often the market will continue to trend in one direction throughout the day to make actively hedging an attractive strategy. You are often better off waiting until the end of the day to hedge your delta. In gold however, it is a different story. In the last week for instance, while the market would move, it seemed to find a way back to unchanged by the end of the day. At unchanged, you have no deltas to hedge from your gamma, and owning at the money options is a losing game (you lose your erosion every day). But that doesn't mean owning gamma is unprofitable if you know what you are doing.

Presumably, whoever has these gamma hedging programs, has some money behind them (enough to put on the risk, and probably to pay a few quants who have figured out optimal hedging levels/ size relative to their gamma given market conditions). I'm sure we'll hear about these guys in a few years; the technical traders who were smart enough to come up with a way to play the technicals in short ranges through the use of front month at the money options with well studied hedging strategies. The game might not work as well in a high volatility environment because from a risk perspective, there would be greater erosion per option and greater moves required for making breakeven. The other reason the active hedging strategy is a lower risk proposition in this environment, is that while volatility can always come in more, it is already at relatively depressed levels. Thus, if there is to be an extreme move in volatility, it is probably higher (and you are long vol when long options, so tail risk is favorable in this trade).

 I hope that the discussion of the above mentioned trade shows the impact that volatility can have on markets direction. As I point out, this strategy might not be so effective, and would be a lot more risky in a high volatility environment. So, when we are talking about the likely direction of gold from here, whatever side you might choose, be aware that it probably won't happen too quickly. At a time where banks are raising their S&P targets (Credit Suisse just raised their target to 1640) it might just make more sense to have money in the stock market. That being said, if you are looking to get into the gold market here, there is a very clear stop that you can use around 1525. I was speaking with a broker whose eyes lit up last week when I brought up gold's last test of 1525. The time was more volatile, and the algos tried to knock it down through that level, but failed as an order of about 6000 lots scooped all of the offers. It was by far the biggest defense of a level I have seen over the course of the last couple years.  So on the longer term chart, this should be a very supportive level. If you want to get long gold here, (1590) then you have 65 dollars of downside until your stop out (somewhere just below 1525). So from a risk perspective, you only have to risk about 4% to the downside. If you look at a 3 year chart of GLD, you will see that the 150 level approximates where 1525 is in the futures. As you will see, this level has been tested multiple times and held since it was first eclipsed in 2011.

While it has been a while since I've written, I hope that this provided a few insights and thoughts that you find valuable or at least worthy of pondering. If you have any questions about the ideas I have, or want to flush them out further, please don't hesitate to send me an email at BenjaminMRyan@gmail.com.

All the best,

Ben

Its a sideways story for now

When I wrote a few weeks back, we were hovering around 1770; right where we trade today. The clear supportive buying behind each dip indicated to me that we would likely get above 1800 and consolidate. While we came within an arm's length, we have yet to breach that level. Is this stall a pause for concern? I think not. In fact, it is probably healthy for the yellow metal to take a little breather here, before maintaining its journey higher.

As it became clear that we were consolidating and not shooting higher, I began to wonder what was in play. Interestingly, two of the technical guys I talk to said essentially the same thing.



Take a look at the above chart. It is a yearly of GLD (not Comex gold, but the chart is essentially the same). Notice all of the consolidation at the end of the chart. That has been the sideways movement gold has seen since my last writing. Consolidation like this is likely to become significant support or resistance going forward (depending on which was we move from here).

But pay attention to the formation of the chart starting in March through where that consolidation begins. You see the formation of a rounding bottom, or U, or as some would say, the cup part of a cup and handle formation (the handle being the recent consolidation). A break above this level would signal a continuation above the uptrend. But how do we know if we have stalled to the point that this upward trend becomes negated?

Those who follow Fibonnaci retracement theory will point out the key ratios of 38.2% and 61.8% as key technical levels of a retracement. So what does that mean?

The highs in March that you see on the above chart (if the chart doesn't show up just go to any major site and look for a 1 year chart on GLD) correspond to approximately 1780/oz in Comex gold. The all-time high in gold was made last September (not on this chart) at about 1920. So here are the key numbers; 1920, 1780, 1530. From 1920 to 1530 (the lows just below 150 that you can see on the chart above) is approximately 400 bucks. 61.8% of 400 is about 250. So a 61.8% retracement of the move from the highs to the lows would be about 250 dollars. 1530 (the low) + 250 gets you 1780, right where we stand and consolidate now.

The inverse of 61.8% (38.2%) should be considered when deciding if and when this up-move has stopped. So since this move off the bottom is about 250 bucks (1530-1780), a down move from the top of 38.2% should stand to negate the move. 38% of 250 is just under 100 dollars. That means that presumably gold could come off down just below 1700, and the long term up-move we are seeing would not be negated. As such, the small short term down moves are not of great concern to the gold bulls. We are a 70$+ move to the downside from even having to consider the long-term bearish implications of this slow down.

The important takeaway from this is that the range of the cup (formed by 1780 in March, down to 1530 and back up to 1780 again) should represent our upside target from the point of consolidation. In English; We retraced 250 dollars up to 1780. It we break above this level to the upside, we should expect to go about 250 dollars higher, giving us a target over 2000/oz.

What are the options telling us?

The truth

For weeks options have been getting cheaper and cheaper; and the wing options (lower premium options that people buy in expectation of big moves) have also been getting cheaper. At the money front month options are trading below 14% volatility. In simple terms, 16% volatility implies that gold would have a daily range (high to low) of about 1%, or approximately 18 bucks. We are seeing much tighter ranges, and thus the options pricing has been appropriate. While relative to recent memory these options look "cheap" they are telling of just how muted futures movement is.

Since options have been a pretty good indicator of the futures market of late, I would like to point their seemingly directional bias. In a vacuum, movement is what dictates options pricing. If we see a big move in either direction, options should get bid. However, we see times where this not the case. For instance, a few months back when gold rallied over 50 dollars on an employment report miss (biggest daily up move in years), volatility got offered (options got cheaper). There are no precise explanations for how these things behave, but keep in mind that options pricing is forward looking. A big move today does not imply a big move tomorrow. If for instance we have a big move that puts gold somewhere on the chart where we historically haven't seen movement, we might see options get cheap. The big move is good for people who are long options (long gamma more specifically), but it will not necessarily entice new options buyers to come to the market. Lately, on intra-day down moves, we have not seen options get bid. This indicates to me that market participants do not believe that a temporary down move implies continued moves to the downside (or rapid snap-backs to the upside). Gold options have tended to get more bid as we move up, which could be considered bullish as options traders are betting that significant movement is more likely to occur as we move higher. All that being said, with QE behind us, short term catalysts for dramatic moves are rather few. For now, the sideways story continues.

Have a great fall football weekend,

Ben

Gold continues to push higher; Why the party doesn't stop

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.

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

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.
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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.
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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.
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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.

John Corzine, above the law... and gold

Before getting to Corzine, lets look at gold.

Last I wrote, I had commented on the possibility that we might finally break out of the 1530-1630 range that we have been stuck in for months. I had written at a time where we saw a high at the very peak of the range (about 1632), but we then sold off. Still, we managed to make it back to 1628....but again, sold back off, dipping below 1600 earlier this week. We do however sit here now, trading approximately 1620, seeming like the yellow metal wants to test the top of that range again (much the way it repeatedly touched the bottom of the range on the downside). So what will make it move?

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.

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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.

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.