GOLD: ALL THAT GLITTERS…

"economy", "markets", "news"

GOLD - WEEKLY CHART

By: FibonacciSQNC

Don’t look now, but gold seems to be back in vogue with traders. It’s difficult to tell if this rally is nothing more than a short-lived pop or the start of a new bull trend. It’s been tough sledding for gold since peaking at $1920 USD per troy ounce back in September of 2011; from that $1920 peak to the most recent trough of $1046 in 2015, gold lost over 45% of its value. For gold bulls, it hasn’t been quite the safe haven many claimed it to be.

Gold futures closed 2015 at $1060 per troy ounce, and as of Monday, February 8, 2016, gold briefly kissed the $1200 mark again, before retreating to the $1190 area. That’s a very impressive move in the yellow metal in such a short period; gold is up a glittering 12% YTD and is the best performing asset class of the year.

Technically, gold has been strong; it reclaimed its 200day moving average at $1132 last week and has rallied right up to $1200 which in the short term could act as a resistance level and sell zone. This is probably not the place to initiate new longs, and the risk of a pullback is high, but depending on how gold acts on its next pullback, “buy the dips” may rule gold in 2016. This still remains to be seen.

GOLD - DAILY CHART

By many measures gold is still in a multi-year downtrend from the 2011 highs, so traders must approach this mineral with caution.

One promising clue to gold’s direction can be found in unusual call option activity in the GLD (the ETF that acts as a tradable instrument for gold). Over the last few weeks, specifically the last few trading sessions, the GLD has seen non-stop out-of-the-money (OTM) call buying. The GLD currently trades around 114. The unusual call activity has found large volume opening buys in strikes at the 120 & 125 levels for March 2016, bullish June 2016 OTM call buying, and even large buying at the 150 strike for January 2017.

There is no debate that the trading and investing environment has been chalk full of uncertainty in 2016. All the major US stock indices have been sold down sharply since the first trading day of year and volatility is king. So this begs the question: Why has gold been shown so much love this year?

There are several possibilities that could explain gold’s renewed interest. Individually, these factors alone may not be enough to rally gold, but keep the aggregate in mind. As Aristotle said, “the whole is greater than the sum of its parts.” Here’s a partial list of reasons behind gold’s strength:

  • Investors and traders are uncertain; maybe gold’s status as a safe haven asset is returning and attracting new money as a hedge.
  • Global Central Banks such as the FED, ECB, BOJ, and PBOC have been propping up markets with artificial stimulus for years; while this is not news, it may finally be acting as a bullish catalyst for gold again.
  • Part of the reason for the sell-off in gold over the last few years was fear that US Federal Reserve would stop its QE bond buying program and embark on a series of interest rate hikes. While the FED did cease QE and did a nominal .25 point rate hike in December 2015, the market does not believe we are in a rising rate environment. Gold tends to outperform in light of stagnant or declining interest rates.
  • In fact, the 10yr Treasury Yield Index has been declining rapidly in 2016 (from 2.3% down to 1.75%), a sign that interest rates will stay lower for longer. This has gold moving inversely to 10yr yields. In fact, this may be the single best reason for gold’s rally in 2016.
  • Negative interest rates by the ECB and most recently the surprise move by the BOJ to go negative, are also adding fuel to the gold rally. Some are speculating that the US could soon embark on a negative interest rate cycle, and this too could be spurring the upward trajectory in gold.
  • The credit markets are looking very shaky. Investors want to know if there are going to be defaults in the oil patch. Will the world experience another credit scare? And who exactly is holding energy debt??? And how much exposure do these players have??? Are the European banks that play in the commodity markets such as Deutsche Bank, Credit Suisse, or Barclays, overexposed??? These are all real concerns and only seem to be buoying the price of gold. As the Pitbull said about the 2007/2008 financial crisis, “There’s rotten wood floating around in the system.” Is Europe going to have a Lehman Brothers/Bear Sterns moment??? Maybe traders are saying gold could be the antidote to all-out financial warfare this time around.
  • The Race to Debase: Gold is more and more being considered a currency. And in light of so many currencies losing value over the last years, gold traders are not sitting idly. Most recently, the US Dollar Index has broken short-term support and this gave gold a very nice upside boost in the first week of February.

If these upside GLD call strikes are in play over the coming weeks and months, it could mean an additional $100 or more of upside to the spot/futures price of gold. Could gold rally north of $1300 and beyond? I think many traders are curious to know, but it also looks like some GLD options players think this is just the beginning of the move.

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