Morning Gold Fix: July 1, 2010

Commentary courtesy of

Gold fell a staggering $36.30, or 3.5% per 100 troy ounces on Thursday. The dollar, another safe haven asset, dropped 2%. Some analysts have suggested gold’s move was the result of a large fund unwinding a position by selling gold and buying back the euro.

Yesterday’s activity was the decisive battle for the time being between the “it’s a commodity crowd” versus the “it’s money stupid” folks.

Put another way, if you believe that we are in a deflationary cycle (like us), and you believe that gold is a commodity only (not like us), then its price must go down relative to currency during deflationary meltdowns.

If however you believe that Gold is not a commodity, and that it is money, then you believe it should hold value , or even appreciate in a deflationary spiral.

We believe that Gold is perception. For 20 years or so, its pricing exhibited the qualities of a commodity due to the global infatuation with Fiat money. Gold took it on the chin in the post Bretton-Woods world once the central bankers got their proverbial shit together. Perception being, we don’t need gold, so let’s just mark it where other commodities are trading, especially while central banks are divesting themselves of it.

Now, we believe that perception is changing. To wit: Gold as a commodity? Ridiculous. It is not consumed, therefore it is not an industrial metal. It is not eaten, and it is not grown. All of the gold ever mined still exists on earth, it cannot be destroyed. Its rate of supply growth increases about 1.7% per annum.  It is money, or a competing asset class for money in the least.

For the last four days, Gold has been in a tug of war. The openings have seen it sell off with everything else under the sun in a deflationary puke. But as each day’s end approached it has rallied and held its own. But yesterday was different. Allow me to explain why from an order flow perspective:

For the last 3 days, a large European fund has been buying the dips as the market gets close to the trend line. They have bought futures and options on every big dip. Yesterday we did not see them buying. So when the market probed their “buy” area and no one was there to buy,  that was a license to  probe further for stops. So on a flow level, the buying dried up and the sellers came in.

On a reason for the selloff, I’d just say that for the time being, commodity perception wins.

But how upset can you be if you’re bullish? Gold is just undoing what it did during its rally in Euro terms. Can that really be upsetting? Volatility is not risk. The macro trend is intact.

A couple days ago we stressed that it is important to know why the market does what it does, and if the correlation holds up, then pick a level to trade.  If it does not, then reassess. For us Gold sold off on a deflationary puke, most likely from sellers smelling that buying dried up, or from someone in a cash crunch liquidating assets for money...Or from a combo of the two.

I’d expect more selling as stops get hit. Then momentum funds will short the market. At that point you pick a spot if you are a buyer and wait for the market to go lower with stochastics not making new lows. That should tell you exhaustion on the move is approaching.  At that point pick your spot. Only thing that invalidates this is if news turns form deflationary to sovereign crisis. If the news turns and the market does not, be careful. For now, I’m trading it short bias looking for a place to cover. But I’m invested long, capisce?

Oh, and buy the way, of course an arb exists between Comex and OTC metals. It is not a riskless arb, but it is an arb nonetheless. And it can be spoofed or manipulated for short periods. And along the lines of a pot odds concept in poker, if you have 50% of the open interest in something, what would it hurt you to push another 1000 lots into the market in the hopes of triggerring a liquidity event (weaker hand getting out) so you can cover? That is how it happens. More on this Monday.

August gold was down 1.0 to $1207.7 per 100 troy ounces as of 6:58 AM EST, this morning. The September U.S. dollar index was down .384 to 84.600. July platinum was up 11.9 to $1515.2 per 50 troy ounces. Silver was up 16.0 cents to 17.920.

-Elizabeth Thawne

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