FMX Connect Explains Today's "Comical" Gold Move To Near Record Highs

Tyler Durden's picture

Submitted by FMX Connect

Connect Gold Options Report – July 12, 2011

Summary

August Gold settled at $1562.30 per troy ounce, a gain of $13.10 for the day.

Market Recap:

Gold opened the day firmer on continued European sovereign concerns. The euro was weaker, the dollar was stronger and gold made new highs in Euro terms. As it did six months ago, the first time the Greek crisis was unveiled, gold is now competing with the dollar for safe haven status.

Tuesday saw Irish government bonds downgraded, debt ceiling negotiations deteriorated, and the curtain lifted on the June 22nd FOMC Minutes. This statement was most notable for its consideration of additional quantitative easing, contingent on economic conditions. This news was enough to spur gold higher, taking out the congestion area that had been giving it such a hard time.

We think what’s happening is almost comical. Most Western governments are in a race to the bottom to get their currencies as low as possible. This is an attempt to cheapen their debt by debasing their currencies. Every time the dollar spikes it must make Bernanke pull the hair he has left out of his head. Every time the euro weakens the Fed does what it can to strengthen it. One way is by opening swap desks with the European banks to give them all the dollars they need. Another way is to say the magical phrase QE3. While the timing of this news is in many respects a coincidence (because the minutes are released weeks after the event) we do recognize that Western economies must devalue their debt. We are in a race to the bottom and the euro is winning, hence the rally in gold.

Gold goes up for two reasons now. The first is obvious: gold is a dollar-denominated asset and as the dollar weakens it will increase in value. The second is sovereign or default risk, which is actually deflationary. Europe and the U.S. will continue taking turns driving gold higher with the Chinese chasing it all the way up.

Volatility was stable to lower with the market slightly higher in the morning. Options remained orderly while we stayed under the congestion in the 1557 area . Once we printed 1560 the landscape changed dramatically. Liquidity providers ran from bids, abandoned their markets and left OTC brokers cursing constant flakers. Skew and volatility both moved upward considerably. The volatility curve you see below is a representation of where volatility was at 4:00 pm and is in no way related to the settlement volatility that the CME generates.
 
Directional Commentary:

Options: Options told us to be bullish yesterday and they did not lie. It appears that volatility has legs to run now. There are approximately 27,000 lots of open interest at the 1600 strike in August. The majority of these purchases were initiated by a large hedge fund. We have to figure this option will come into play. One item that gives us pause is that the August 1630 Call and 1650 Call were sold near the highs, so someone may be expecting a pullback. So while that mitigates options’ bullish sentiments a little we’re sure that futures longs will be selling calls to create dividends at these volatility and skew levels. Conclusion: Bullish

Technical: Yesterday we said gold was looking for a settlement above 1556 before it began to break-out in earnest. Having eclipsed that level we are expecting a run on all-time highs, actually we are only a couple of dollars away. We expect this rally to make an attempt at 1600 and for the large open interest at this strike across the term structure to be a major factor. Large open interest at a specific strike is a cause for concern and even more so when a large percentage is in the hands of a few players and their counterparties are undercapitalized and fragmented; this is a classic recipe for a short squeeze in the option. In general the fragmented undercapitalized professionals are professionals who will buy futures in a rallying market to mitigate their adverse change in delta. The long isn’t hedging or selling futures to sell positive gamma, he wants his options to go in the money and has the pockets to be patient. Many times the mere size of the open interest and the fragmentation of the short-side counterparties creates the gravitational pull needed to go through the strike or at least to the strike. In this particular instance, we think the long is strong and that August gold will print 1600. Past that point, gold could try for the top of the trading channel. We become more neutral with a settlement below 1560.

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living on the edge's picture

I bought more Gold last Friday and again yesterday. Glad I did. 

doesmybuttlookfatinthis's picture

I like the junior miners. You can pick them up for chump change. And when gold goes ballistic they will out pace the increase in gold by 3 or 4 times.

Crisismode's picture

You are dreaming and smoking great dope.

 

The miners are dead meat, and you know it.

 

Stop talking your weak book.

Whalley World's picture

Shit's real,

them miners are set to make folks rich for those in early (ten years on,still early)

when the crap comes down, those golden claims on ounces will catch fire.

Oh regional Indian's picture

I think for a while, starting sometime next week, everything, including gold and silver, are going to be in deep doo. A buying opportunity of a life-time perhaps.

I see a super-deflationary snap, short and brutal and then the hyper-I episode begins.

By the way, not sure how many people are followign the great temple treasure discovery in India, but they've discovered over 3 tonnes of gold already.

I say the three swimming pools full theory is total rot. Gold will tank, it's rare, but it's been mined for millenia.

ORI

http://aadivaahan.wordpress.com/2010/10/18/an-opportunity-and-a-golden-warning/

 

Reptil's picture

Disagree.

It's not a question of rarity, it's value is increasing in reference to the £€$ because it's fungible, accepted money everywhere. That it's use and ownership is widespread is one argument for it's use as (intermediate) currency. (Before the next system of fiat, after the collapse is put into place.) For those that want to stay liquid, in a deflationairy collapse, there is not equal currency, in that no other has no counterparty risk, the Swiss Franc included.

Now silver, there's an interesting case. A tandem with gold for currency? Or "just" a valuable commoddity? There's not that much of it available above ground. It too is widespread though.

There may be a spike in the dollar, next week. Then it'll be time to "back up the truck" as people here put it so aptly. I'm not counting on it. Shit is hitting the fan, and the yellow metal is a life-boat. Once it's gone, that's it.

Cheers

 

DoChenRollingBearing's picture

@ living,

Good for you!  I wonder if there will be any physical left upon my return to the USA...

The lowly Bearing has been here in Peru on, well, bearing business.  So, I have not had the opportunity to have purchased from just above $1500 of not long ago.

But, we had an extremely positive meeting today with Mr. Maekawa.  I will post details at my blog, with luck tomorrow (Weds.).  A long and arduous meeting, but very positive!

I know that some ZH-ers have asked to be linked to my blog, and I will get to that when I am at our ¨secure¨ computer at the office here in Lima.

I can hardly wait to get back in the gold game when I return...

living on the edge's picture

The world just moved 10-steps closer to the edge. Can the monetary magicians pull the world back from the brink? That is the question for the ages.

mynhair's picture

Why was it comical?  Cuz it didn't hit $2000?

tmosley's picture

Because there was no reason for it, except the reason that has been in full view since 2008, but no-one wants to accept that, but they apparently do in fits and starts without admitting it.

DoChenRollingBearing's picture

+ $1560

(or whatever, I have been working too damn hard here south of the equator these recent days to keep up!)

SheepDog-One's picture

$13 gold rise 'comical'? Why arent they calling 100 P/E stocks comical?

Tejano's picture

Maybe because it's like slapstick - predictable. You know it's gonna' happen. You see it coming. When it goes 'BAM', you laugh anyway.

But here, unlike in slapstick comedy, there may be actual physical damage inflicted.

BC6's picture

Gold is transitory

Crisismode's picture

Huevos Rancheros. Spicey and hot. Smack the lips now.

mr_T's picture

Bought more buffalos two weeks ago and those nice 5oz silver national parks... APMEX rocks they ship international.. small plug... Hard to find a good EU online dealer... About 70% pm now.. loaded up on some miners as well. Average up.. I will buy more Au above 1650..

chump666's picture

More comedy.  The clowns of the market (China and Japan) are begin the intervention cues.  Japan on the AUD/JPY cross and China saying it will drop a trillion yuan into various economies.

Crisismode's picture

China and Japan can carry the water from one side of the ocean to the other, and you know what? Sea level remains the same.

spinone's picture

I'm afraid a bout of deflation when the monetary interventions finally fail will kick the legs from under all asset classes.

Kali's picture

Thats when ya back up the truck!

mayhem_korner's picture

It's still about relative purchasing power.  Doesn't matter if gold drops to 500 FRNs per oz  if it still is able to purchase 300 gallons of diesel.

FeralSerf's picture

A Sopwith Camel won't run very well on diesel.

caerus's picture

New highs?  Adjusted for inflation?  long the all-star game...out

ddtuttle's picture

Small correction: gold is not a dollar denominated asset, the dollar is a gold denominated asset.

ATM's picture

as are all currencies

cranky-old-geezer's picture

Neither is correct.

It's a forex thing.  GOLDUSD, GOLDEUR, etc.

Gold has been true money for 5,000 years.  Paper currencies are a flash in the pan.  They come and go, as will the US dollar, as will the Euro, etc.

Gold and silver are the only constitutional money in America. And no, it doesn't mean gold-backed paper nor silver-backed paper.  It means gold and silver.  The actual metal.

jack stephan's picture

I get "Youre overbearing", fine, great.

"Ok, well why is it nation after nation is buying gold stockpiles?"

Duhhh, which way did he go, boss? Best Mel Blanc voice

SilverIsKing's picture

Gold tastes great too.

Frankie Carbone's picture

Yes it does. One thing you might want to do when drinking Goldschager is to recycle the gold that passes through your system.

Think about it. You've got a case of Goldschager stowed away for sippin'. It's late 2012 and you're watching the human tragicomedy play out from your front lawn (AR-15 at your side of course).

And you're sipping a Goldschager. Gold's price is out of the stratosphere.

Ahh, but a problem...

Later than evening, or with the morning dump, you're gonna crap out enough gold flakes to buy a month's worth of groceries. Perhaps even a side of beef.

Might want to figure out how to get those flakes out of your steamy pile, if you know what I mean.

Crisismode's picture

Easy.

Do it on the front end.

Pour the Goldschlager through a coffee filter BEFORE you drink it.

1. You still get all the alcohol into your belly.

2. The coffee filter is still there in the morning with all the flakes intact.

 

Bingo!

Reptil's picture

you actually thought about this ahahaha

 

I'm heading for the liquor store now...

hahaha wat a nice waste of time.

Helena Bonham-Carter's picture

  And then believe me, my love is as fair,
  As any mother's child, though not so bright
  As those gold candles fixed in heaven's air:
    Let them say more that like of hearsay well,
    I will not praise that purpose not to sell.

apberusdisvet's picture

Within a month we will know the effects of the PanAsian Exchange; let's hope the Chinese go all in.

DavidPierre's picture


One more huge reason the New Pan Asia Gold Exchange will end Western naked shorting. The Asian Exchange plans to open with 100 million ounces of silver in hand.

KNOW-ONE KNOWS WHERE THIS QUANTITY WILL COME FROM !

This alone could easily cause severe silver shortages that will directly affect the ability of all naked shorts to cover.

First, the new exchange will have rules against naked shorting any contract and unlike the West, the rules will be inforced with severe penalties for braking them.

Secondly, when the world's traders see that naked shorting will not be tollerated on the new exchange, honest traders will flock to the new exchange and abandon the corrupt Western Exchanges.

Third, the growth of the new exchange will force all exchanges to clean up their act or lose most volume and all trust. Investors will embrace the exchange they trust the most.

Fourth, All demands for delivery will be honored with actual bullion, not cash. If redemption is fast, all investors will take notice and a huge amount of bullion could quickly transfer from the West to the East causing the Western exchanges to implode.

Tejano's picture

Trust the party bosses to run a "clean" market? Maybe, maybe not. But who needs aircraft carriers when you've got a PAGE?

cosmictrainwreck's picture

and if they implode.....good riddance. sleazy, lyin' bitchin' hoes

bakken's picture

Gee, when was the last time anyone held an honest Chinese Fan-tan game over there?  The Chinese come over to Vegas to play here since they only have to worry about the actual bad odds not the "Big Fix".

I will be truly shocked if the Pan Asian exchange doesn't collapse within two years.  That's just the odds for new 'financial" product.

Manthong's picture

" the world will only supply about 979 million ounces this year from mine and recycling of scrap, of which it is estimated that 657 million ounces will be used up for non-investment purposes so, in effect, that leaves only 322 million ounces available this year "

http://www.munknee.com/2011/07/sprott-shocking-shenanigans-in-paper-vs-p...

Your guess is as good as mine.

I just know I'm not letting go of my ounces until the G/S ratio is in the teens and maybe not even then.

Vint Slugs's picture

DP

Rate you -1. 

The hundred mil oz will come from mainland China.  They're the big short that the conspiracy theorists just don't understand.  Short -- but not naked.

DoChenRollingBearing's picture

Always insightful DavidPierre, thanks!

static's picture

nice po in the miners today

Crisismode's picture

Really?

 

Looked like "poop" to me.