Gold Bulls Keep Getting Off the Mat to Fight Another Day
After a few wobbles, gold and silver have weathered a rough week in United States and around the globe -- but strong hands were there to support the price.
Great Britain was able to replace David Cameron in a seamless transition while its central bank defied expectations and kept interest rates unchanged at least until next month, causing the pound to rally. The yen has weakened as a safe haven, as the Ben Bernanke implores Shinzo Abe to use helicopter money for fiscal stimulus, and economic numbers coming from both the U.S. and China have been better than expected the past 48 hours. All of this in a backdrop where U.S. indices have set new record highs and European equities have recovered all of the post-Brexit losses.
That is the headline information driving gold from a high of $1376 on Sunday night to a low of $1315 on BOE surprise. The macro picture remains unchanged and in some cases maybe even more bullish for the need of safe-haven protection. Mark Carney of the the BOE has already indicated that he will cut rates next month while property funds in Britain have halted redemptions. Abe has not presented a fiscal stimulus package that will head off continued deflationary worries in Japan and it is unknown what the recent yen strength (biggest one week drop in 17 years) has done to the Japanese economy. No one believes the Chinese GDP is really 6.7% especially with the fixed asset investment at only 9.4% while easy money in China is creating another property bubble. Although the Terroist attack in Nice is being shrugged off by the investment community, the ramifications of such attacks in light of Brexit and the immigration/migration issues in the U.S. political spectrum are going to have consequences of uncertainty.
Granted, it is good news that German bunds have gotten all the way back to zero interest rate and the U.S. 10-year yield has rallied from 1.32% to 1.57% in the past week on growth expectations, but with central banks both here and in Europe keeping easy money on the table for the foreseeable future, investors will still want assets that can not be manipulated. As Atlanta Fed chair Lockhart said yesterday, he still denies the Fed is "behind the curve" and proposes "patience and caution." These guys are great! The one thing to watch is that these policies are not necessarily going to drive passive investors back to commodities like we saw from 2002 to 2013, but it is making hard assets more attractive to individual investors who have access thought ETFs and local bank trading platforms, especially in Asia.
As far as gold trading this week, the price is down 2.4% for the week but remains up over 25% year-to-date, while silver is the star performers rising 46% year-to-date. Volumes all week in gold futures have been heavy, although a bit lighter today. Open interest in gold futures has declined over 5 million ounces since Monday, although the drawdown from the record high net long of 34 million ounces will not show on the commitment of traders report today as it only goes through Tuesday.
The (GLD) - Get Report ETF had its biggest outflow on Tuesday of 16 tons but since then has steadied. Options activity on Comex has dwindled but has been offset by continued growth in option activity in the GLD ETF. With the GLD hovering just below $126.70 the September 125 puts (expiration September 16th) have seen a tranche of 36,000 contracts being purchased for around $2.40 at an implied volatility of 16.2%, down 2% since the start of the week.The total open interest in that contract is 51,000 contracts. This may be a speculator making a large bearish bet or just protection against a long underlying position.
The July GLD option contract expires at 4:00 p.m. today, so I would expect to see a flurry of activity Monday in the front month August contract. Our trade from last week is long the same September expiration $130 calls against being short 2x $140 calls, which is little changed in value as implied volatility dipping continues to offset the underlying price moving lower. I am sticking with this trade, despite analyst and traders calling for gold to "fall out of bed" soon. I feel gold is consolidating and earnings season may slow the bullish flow into equities. I may even add to my bullish position by buying some outright calls as at the money implied vols fall to. 15%, but will hold off for now as I never like to spend premium over the weekend.
Copper lead base metals higher on the initial print of 6.7% growth in China vs. expectations of 6.6%. As mentioned earlier, fixed asset investment fell short, although industrial production beat expectation. On the margin, if you believe the numbers, it is bullish for industrial metals, but the speculative community in Shanghai is so bullish on hopes of a PBOC rate cut that these numbers will allow the central bank to stay the present course. Their focus may be on not allowing the housing market to become more overheated, which will be bearish, therefore, most metals reversed before the end of the day. The LME has proposed a new rule to freeze rent increases to try to keep metal from moving off warrant (off exchange) which could give more transparency to inventories. It is doubtful that it will get approval as rents are prices in U.S. dollars and would leave merchants at the mercy of currency movements. Zinc continues to outperform as the Chinese are pouring money into both zinc and nickel.
Energy prices have had an unsteady week with inventories disappointing both in liquid as and natural gas. Gasoline inventories are now having analysts talk of tank tops like crude did six months ago. It is unfounded but is weighing on the entire liquid complex. The dollar index, which is trading at its 200 day moving average, is weighing on crude as well, although news of yet another Force Majeure in Nigeria by Exxon (XOM) - Get Report at Qua Iboe due to militant attacks has 672,000 barrels/day at risk.
Although the natural gas injection of 64 (expected 67) disappointed me, I am still sticking with the calendar call spread as warming trends across the West/East and southeast. Most of the flows have been 1x2 put spreads by producers and financing them by selling calls, so implied volatility has been under pressure.
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.