Goldman's Head Gold Trader On The Recoupling Between Gold (Which Is Up 14% YTD) And Money, And Why This Is 2008 All Over Again

Tyler Durden's picture

From Goldman head gold trader, not the always wrong sellside analysts or researchs, Zak Dhabalia. Note none of this shoule be a surprise to those who invest in gold, instead of trading it based on 1 minute momentum, which unfortunately is ever more of the bipolar investing public.

Well its hard to be coherent let alone add any value after the some of the moves we have seen in the last few sessions. Gold fell 12% in 3 days to reach 1535 this morning before bouncing back to 1620 an hour later. Silver has fallen 33% in 3 days to $26.15 this morning having been at $40 last week and almost $50 back in May.
 
It seems hard to believe but Gold is still up 14% YTD and only back to the levels of beginning of August whereas silver is basically flat on the year. This reflects the separation of the monetary asset and industrial characteristics of gold and other precious metals. Indeed Palladium is now down over 22% on the year and Platinum down 15% suggesting real concerns about the outlook for industrial demand on a global basis where Asian demand for PGMs have been critical to prior price rallies.
 
This reminds me very much of late 2008 when gold fell from 1000 to 700 (30%) but the other metals and even equities fell over 50%. Then and now many commentators were wondering if the game was over for gold especially as Vols quickly spiked to such high levels in the prior run up, always an important indicator of coming corrections as the safe haven characteristics then become more suspect. What we are seeing in the market place is high volume turnover on the exchange but extremely low liquidity and huge activity on the screens rather than in the OTC discretionary space where most of our counterparties have had very little risk in gold for several weeks. Interbank flows are almost extinct.
 
There is no doubt that long risk in gold has been drastically cut back. The latest comex data show another 1.5m oz fall to 25m oz and I suspect the data for the week ending tomorrow could show a decline of over 3m oz. The ETF positions appear to have been more resilient. The concern will be if tech funds decide to cut entirely and even go short. In this liquidity that can still have a significant impact on prices. However in the context of the macro markets I am not convinced at all the game is over for gold. In fact far from it. The rally in the dollar is not from a position of strength but more a reflection of panic about the risk of disorderly outcomes to fiscal and monetary policies in the face of poor political coordination. The search is for liquidity and the prices of industrial metals suggest real fears about the future growth of demand.
 
I think such a backdrop will be a supportive environment for gold in the same way that it outperformed in 2008 into 2009 but also for nominal performance. At that time Central Banks were also sellers but now we have seen official sector demand throughout last week during the decline. Anecdotally we have heard that physical demand in India is picking up hard this morning.
 
I firmly believe that as we have seen several times since 2008 these financial spec corrections for gold allow the bull run to reset positions and cleanup the market for the overall trend to remain intact and take prices higher later.  It makes sense to be cautious with vols so high but those buying gold below 1550 for medium to long term views are being handed an opportunity where the risk reward seems a wonderful opportunity.
 
Good luck
 
Zak

Gold options( Lars Ahlgreen )
1m 37.00/40.00
2m 35.00/37.50
3m 33.50/35.75
6m 31.50/33.50
1yr 30.50/32.50
 
Gold vols through the roof, and liquidity all but evaporated. 1mth vol trading up 8 vols from the close on Friday, with a large variety of smaller names buying. The velocity and extend of this down move has definitely surprised me, but in the context of metals it unfortunately makes sense.
 
Silver
1m 60/80
2m 55/70
3m 50/60
6m 49/54
1yr 46/51
 
Silver vols exploding. 1wk is up roughly 50 vols from the settle on Friday and the market is very wide and extremely illiquid.