Gold Continues to Build a Bullish Base, Despite Global Headaches

A rough week for the metal should be just a blip as the policies of central banks and the U.S. presidential election take back the spotlight from bad news everywhere.
By Ben Cross ,

As musician Bob Seger might have said, gold bulls have been "against the wind" during the past week since reaching a recent high of $1,375, falling 2.3% while the headlines cheer new daily equity rallies.

Shootings in the U.S., a terrorist attack in Nice, France, and an attempted coup in Turkey have done nothing to help the bullish sentiment toward gold. What those events have done, though, is heighten the uncertainty in developed countries, while reinforcing the risk of investing in emerging economies.

But those events will likely be a blip in terms of gold, as the policies of global central bankers and the U.S. presidential election season should soon take back the spotlight. This should help keep the yellow metal in vogue for macro and retail investors who are looking to have some protection in their portfolios, especially as other instruments, such as the VIX volatility index, haven't provided much protection, except to day traders.

Better economic data from China and the U.S. may give traders pause that central bankers may start more tightening rhetoric especially. But it looks like they have packed their bags for vacation at least until December, which macro investors think will put them firmly behind the curve.

As far as gold trading, the commitment of traders showed a decrease of net length of 1.5 million ounces last week down to 32.45 million ounces. Silver net length increased 7.1 million ounces to 501 million ounces.

These numbers include the reduction of shorts from the commercial hedgers such as market makers. Both platinum and palladium added more than 210,000 ounces of net length as gold investors diversified a bit.

Of course, these data only go through last Tuesday, and it looks like Friday will show another liquidation of 3 million more ounces of net length. The weekly outflow was 3.9 metric tons last week, the first outflow since April when the Federal Reserve indicated that it was leaning toward raising rates.

On the implied volatility front, gold at the money has slipped from 18% 10 days ago to 15.5%, and silver at the money has moved from 31% to below 27%. The option interest has waned each day in the futures market, and the biggest open interest going into the large August expiration on July 27 is the $1,350 call strike, which has open interest of 5,000 contracts.

We will then watch for the August futures rollover to December, which usually creates some fireworks when there is such high open interest. The option idea we initiated on July 7, which was in the GLD ETF Sept. 16 expiration of long a 130 call against short 2 times 140 calls is little changed, but as we get closer to 15% implied volatility in the September-October time period, I may have to add some option length on the back of the uncertainty of the presidential election.

On the producer side, Harmony Gold Mining said that it hedged 432,000 ounces or 20% of its output at a price of 682,000 rand, which is higher than the all-time high Zar/gold price set last month. It probably wasn't a bad idea, despite what equity investors may say, as Harmony Gold Harmony is up 379% in dollar terms since the start of the year.

Meanwhile, oil continues its roller coaster ride as speculative longs buying on Friday as the Turkish news started to leak, have had to sell holdings. As we await fresh inventory numbers, the expectation is that U.S. crude supplies fell about 1.7 million barrels.

News of the Baker Hughes rig count rising by 6 is weighing on the WTI. Manage money net length in the WTI increased by 11,000 contracts last week, after hitting a three-month low.

Natural gas is treading water, despite the warmer weather in the East and Southwest, and the expectation of much warmer weather by the end of this week. Inventories are still 22% above the five-year average, but the surplus has continued to narrow.

The calendar call spread we have in place is still worth holding on to.

The long September $3 call, in which we are long (expiring Aug. 26) is trading at .056, while the August $3 call, in which we are short (expiring a week from tomorrow) is trading at 1 cent and looks like it will be worthless. So we will effectively own the September $3 call for 4 cents, which is what we paid for the call spread at inception. 

Base metals and iron ore both traded lower overnight as some Chinese speculators unwind length on fears that the Chinese central bank may not ease rates anytime soon. The industrial production numbers and gross domestic product were both better than expected.

The speculators are very overbought in Shanghai, so there may not be another wave of selling. 

Option activity on the London Metal Exchange has been muted for a long time, with the exception of some producer collars in copper and nickel on speculative buying, based on a report that Berong Nickel in the Philippines has suspended operation. Rumors of possible government shutdowns of nickel production from the Philippines has been widespread but has yet to be confirmed.

Nickel has rallied back above $10,500 on the report. 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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