Morning Gold Fix – June 30, 2010

FMX | Connect – www.fmxconnect.com - (Reported 6/30/2010)

The following is a summary of yesterday’s US gold activity and a recap of Asia & European markets overnight. It includes our proprietary options analytics and news stories from industry professionals.

Summary

Gold traded in a wide range on Tuesday as markets reacted to frightening news. Slowing growth from China shocked the market, driving oil prices more than $3 lower,dropping the Standard & Poor 500 ~30 handles and leaving gold and the dollar as the prime beneficiaries. More contagion fears from Europe and paltry consumer confidence reports didn’t help matters either. Gold sold as low as $1228 per 100 troy ounces on Tuesday before ultimately closing just over $1246, a $4.80 gain for the day.

Razzles

Yesterday’s activity was in our opinion a microcosm of the main drivers currently having a tug of war on the precious metals markets, i.e. deflation risk and European sovereign default risk. Forget inflation for now. Sure Gold is a hedge for inflation, but so is your house, or a Cadillac. Our own analysis almost never seeks to predict price movement, but instead seeks  to understand if observed correlations between events and price movement are in fact causations.  Yesterday was a great day to provide a clean data point in what we think are the main movers of gold currently.  Our conclusion is simple and may have been obvious to readers, but we are ecstatic to have a better handle on the “whys” of market movement. As reactionary traders, it allows us to know better what to do in an event. Do we step in front of it, or do we go with a trend? Do we take profits or add to positions?

Our suspicions are simple: deflationary events drive gold lower, sovereign default risk drives it higher. The dollar, stock market, and bond market are secondary as proxys now (OMG, I can’t believe I said that… Gold is its own asset now!)

Here is what we saw yesterday.

Deflation: an unexpected revision to a leading indicator there helped give a sharp decline  in Chinese equities which spilled over into Europe and the U.S. markets.  Double dip… you betcha!  Forget about China supporting the global markets. (which we think was silly anyway. Their stimulus investments were to generate more exports, the Chinese people aren’t becoming meaningful consumers anytime soon)  Outcome: bearish for equities, commodities. At this point of the day, gold was priced like it was a commodity, and dragged down. CANDY

Sovereign Risk: Thursday, the ECB bank-lending program expires and the leaders were trying to reassure investors that it would not destabilize the European financial system. Outcome: bearish for equities, bearish for the Euro, and Gold goes higher. Now gold is being priced like a safe haven. It rallied along with the Dollar.  GUM

A perfect day for scientists looking to filter out noise and get good correlations. Our speculative conclusion is this: deflation risk morphs into Sovereign risk at some point. The U.S. markets are pricing in deflation but not sovereign default, but the European markets equate deflation with potential default. The U.S. is just a really tall pygmy right now.

More importantly our reactionary trading conclusion is:  If you are a Gold Bull, the next time Gold craps out, look around for deflationary news. If there is some, then ask yourself if it is time to buy. If there is none, then be careful. Something new is happening, be careful stepping in front of a freight train. Once you identify the driver, then make your decision.

On the upside: if no sovereign default related news is out and gold spikes, don’t get in its way. Something new is up. Figure out if this is a parabolic irrational spike to be sold into, or if it is something unknown and get out of the way.

The point is, we don’t add to positions unless we know the reason for the move.

Contango Watch: Metals spreads continue to come in as some community members remind us.  But this is on the back of the bond market rally. We’d like to view this as a short squeeze coming, but it is not. It is just interest rate arbitrage for now.

Tuesday Options Recap

Today was an interesting day for volatility players. Futures came in lower and volatility was firm which is to be expected these days, especially with the put demand coming from the ETF business. What was interesting was the demand from seemingly out of nowhere for December 2010 through June 2012 volatility. Straddles and puts were bid and it would seem that a deal was done in the June 1200 puts. Market makers and dealers scrambled to cover the volatility risk and in doing so slowly drove volatility higher across the whole curve. About mid way through the rally in volatility, the futures turned and our and rallied. So what started as a bid in straddles and puts ended with a bid in straddles and calls. Moves like this are rare but becoming more frequent in this new environment. Implications are either producers are hedging further out on the curve, or a macro volatility player is upping the ante. Stay tuned.

August gold was up 0.8 to $1243.2 per 100 troy ounces as of 7:02 AM EST, this morning. The September U.S. dollar index was down .245 to 86.095. July platinum was down 7.1 to $1541.0 per 50 troy ounces. Silver was down 8.6 cents to 18.68.

-Elizabeth Thawne

For Market Prices Click Here

Tuesday Options Report

End of Day Straddle Runs

FMX Morning Newswire

Bloomberg (Reported 6/30/2010)

“Gold, little changed in London today, may gain for a second day as concern over the economic recovery fuels demand for bullion as a means of protecting wealth. The dollar weakened against the euro before a U.S. report today forecast to show business activity expanded at a slower pace and after the European Central Bank said it would lend banks 131.9 billion euros ($161.5 billion).

Gold is headed for its biggest quarterly advance since the end of 2007. Holdings in the world’s biggest gold-backed exchange-traded fund rose to a record yesterday. ” Gold Heads for Biggest Quarterly Gain Since 2007 on European Debt Crisis

NS Futures (Reported 6/30/2010)

“Despite a display of corrective action in the prior trading session, the August gold contract overnight seems to have regained some ground on the charts off a rekindling of the flight to quality mentality. It did seem as if gold and the rest of the metals markets were under broad based physical commodity selling pressure yesterday, off the idea that the global recovery was being called into question again.

Equity markets in Asia were mostly lower, but stock markets in Europe are generally higher this morning, which has helped US stock indices to move moderately higher during the initial Wednesday morning trading action. The Dollar has lost some ground against the Euro, but remains stronger versus the Yen and the Pound going into the US opening.” Daily Metals Commentary 

Reuters (Reported 6/30/2010)

“Gold steadied in Europe on Wednesday, giving up early gains, after relatively low demand at the European Central Bank's latest bank refinancing operations eased some concerns over euro zone bank finances.Gold is still set to be the best-performing metal of the second quarter, however, as fears over the global growth outlook and the stability of the financial system persist.

Spot gold was bid at $1,240.45 an ounce at 0944 GMT (5:44 a.m. EDT), against $1,238.00 late in New York on Tuesday, having earlier risen as high as $1,244.55. U.S. gold futures for August delivery eased 90 cents an ounce to $1,241.50.” Gold holds near $1,240 as haven buying supports

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