Acoustic Shadows and Gold

Presently it appears the markets have the “bad guys on the run” relishing U.S. elections results, renewed ECB clarity, and no worse than feared economic data. Market participants dedicated the weekend to the dissection of Friday’s October jobs report, frantically tipping their gold overboard on Monday in commemoration of the dark days of overly abundant labor market slack, higher unemployment rates, weak U.S. dollar and knotty interest rate yield curves.

There is a renewed confidence in the U.S. and its assets, making gold seem outmoded and unnecessary.

Gold trade action continues to baffle: Gold option traders are wary as they record extreme levels of implied volatility (i.e. the extrinsic value or premium associated with a call or put option).  One-month implied volatility is trading at a 95th percentile high, six-month volatility in the 77th percentile, and put demand remains incredibly dense as judged by skew levels (i.e. the difference in implied volatility levels between equidistant calls and puts) recorded in the mid-90th percentile.

Official (CFTC) Commitments of Traders data for the week ending November 4 exposed a deeper reduction in net ownership of futures contracts due to amplified short selling.   Market technicians are convicted that gold is consolidating between $1130.00 and $1180.00 which, if conclusively ruptured, would call for the next move to $1100.00 or $1200.00.

In other words, who knows?!?

The Gold Trade and Acoustic Shadow

During the epic battle of Gettysburg, two of General Lee’s lieutenant generals, Richard S. Ewell and James Longstreet, were commanded to attack the Round Top Mountains from opposing sides. Ewell was to begin his assault when he heard Longstreet’s artillery bombardment. However, he never heard Longstreet’s attack, and Union General Meade was able to successfully defend against the onslaught.  Scientists believe that large natural formations combined with hot temperatures near the ground triggered sound waves to dramatically refract upward as history records people 100 miles away hearing the battle on July 1, 1863, while those just 10 miles away, could not.

This phenomenon is what we now call an acoustic shadow - areas where sounds, from a certain direction and on a given day, will not infiltrate. These acoustic occurrences appear either because the sound waves are absorbed, refracted or simply blown in a different direction. I’m afraid the current gold trade may be giving off an acoustical shadow of sorts as its current pricing appears overly correlated to the sensory surrounding us while the far distant chaos isn’t being properly discerned.

I became officially “bearish” on gold after the 2013 “taper tantrum” when gold futures were trading in the low $1,200’s as I felt (as I do now) U.S. monetary policy will ultimately be a sword over gold’s head.  Having agonizingly outperformed my expectations for most of 2014, the wheels began to fall off the gold trade in early July, having shed all of its year-to-date gains, and in the last few weeks, has come close to being shuddered, with the price authoritatively breaking through major support levels to new four-year lows.  Disentangling factors driving gold prices is both difficult and very dangerous business to engage in.  Gold does appear sickly but I wonder if the current pricing has made too many blasé assumptions.

I think of the latest plummeting US inflation expectations quickly translating into a stronger U.S. dollar and thus a lower gold price.  The U.S. disinflationary headlines are written at reckless speed and do a significant job in numbing its patients into what the world should look like and why.  Trouble is, the ferry boat gets too crowded and will then sharply list to port.  From my vantage point, inflation expectations are so dreadfully low, the only surprise we will eventually have is up.  That, by the way, would be gold bullish!

The global economy is growing at a fragile rate and within it we have central bank monetary policy divergence : The U.S is tapering/tightening while the European Central Bank and Bank of Japan are loosening.  If these worldwide monetary policies go as planned then yes, the result will be gold neutral to gold bearish.  For my money, no matter what happens to the U.S. dollar (it’s a long-term comparative measure) – will be, at the minimum, gold supportive.  Recall, this is a global experiment that has never been tried and there is no manual to suggest how it will all end up.