Golden Caveat: Weekend Event Risk
If nothing happens, Gold could have a serious correction. And odds are nothing will happen. And that could mean a retracement to $1255 or lower in a heartbeat.
That doesn't mean the world has resolved its problems. It simply means that once again, hot money that thinks gold is a deeper market than it is will trample itself and bonafide investors as they run for the door.
The other concern we have is that Silver, while powering through most of the producer related hedging, did not settle above $18.55
From a previous post
Silver Still Not Out of the Rough
“[Silver] producers typically hedge concurrently. For the last few weeks, we saw that many producers had sell orders in the $18 area,” Lanci said.
He went on to add more caution, “Based on our industry contacts and a large sale of June $21.00 calls in February before the $18 level wash out soon after, we do not think silver will breach $21.00.”
He added that banks know about these orders and are tempted to sell ahead of producer hedges. “This is a recipe for a violent rejection lower, as we are seeing today. But it is not the first time.”
Above $1854 Should be a Rocket Ship Ride
According to Lanci’s research, silver has a tendency of rejecting the $18 area “quite violently,” although he added that “rejection” does not always mean lower prices.
“If too many shorts front-run the producer sales, and an event like Brexit occurs as in July 2016, the rally can be a disaster for shorts. When silver pushed back to $18 in July 2016, those producer hedges were gobbled up by fresh money and the shorts were bagged and tagged,” he explained. “There was little to stop silver from rallying as high as it did. That was a bonafide short squeeze by players who got cut front running producer hedges.”
The fact thatSilver has not cleared the $18.54 area gives us serious pause. it suggests that more hedging lingers right here.
Combine that with the tendency for Gold to get frothy before known events and then wash out afterwards, and you should be careful.
Gold Likes Surprises, Planners Get Trampled Underfoot
We like to see surprise events drive gold. Events like Brexit. We are not fans of people plowing into Gold in expectation of weekend holiday worries.
The increase in option related hedging in Gold gives us encouragement. This is a sign of longer term commitment to the actual underlying. But for every guy that hedged, there are 2 that will puke if the market starts to wither.
Just be informed. An event that is known about rarely pans out in Gold.
About the Author:
Vince Lanci has 27 years’ experience trading Commodity Derivatives. Retired from active trading in 2008, Vince now manages personal investments through his Echobay entity. He advises natural resource firms on market risk. Over the years, his expertise and testimony have been requested in energy, precious metals, and derivative fraud cases. Lanci is known for his passion in identifying unfairness in market structure and uneven playing fields. He is a frequent contributor to Zerohedge and Marketslant on such topics. Vince contributes to Bloomberg and Reuters finance articles as well. He continues to lead the Soren K. Group of writers on Marketslant.
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