Gold’s broad and volatile trading range continues as CME Group April ’15 gold futures witnessed a low of $1168.30 per ounce established on January 2, only to rally to $1308.80 per ounce 20 days later and, finally fall back in the low $1200 per ounce area where it sits now.
It should come as little surprise that gold options implied volatility is currently elevated with three-month option implied volatility (i.e., the amount of premium charged for a call or put) is trading at 17% - well below its one-year high of near 20% yet still, persistently above the average volatility level of 15%. Ironically, gold options skew (i.e., the price paid for equidistant calls vs. puts) has recently flattened out and is now trading in the 30th percentile. Typically, options skew flattens due to resurgence of upside call demand, wholesale selling of downside puts or both.
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Yet, golds price action is definitely not overly extraordinary when matched to other asset classes including the U.S. 10-year Treasury note, where in less than two weeks, yields managed to bounce from their low of 1.70% to the Tuesday 2/17 high of 2.13%. Additionally, the S&P 500, after hitting a February 2 intra-day bottom of 1980, managed to climb nearly 6% to a high of 2100.
Also, when thinking of gold in a commodities context, it’s wise to discern expectations as commodity prices had a very pitiable end to 2014 and this theme rolled into the New Year where many base and bulk commodities plumed depths not seen since 2009. Oversupply, flat demand, or a deep structural change within the commodities industry aside, gold behaved remarkably well.
We entered 2015 with sharp reminders of a fragile global economy including the mysterious implications of the halving of oil, central banks around the world and their continual “surprise” rate cuts, the world banks reduction of its global growth forecast, along with the tense situation in Ukraine spurred gold to make its meteoric 9.25% rise in early 2015 as sudden and stubborn buy demand ensued from the retail investor where (GLD) SPDR Gold Shares, after multi-months of constant liquidations, found holdings increased by a stunning 20 tons in the first few weeks of the year.
Similarly, there was a steady rise in speculative buying by professional fund managers as judged by published reports by the CFTC. In addition, according to the World Gold Council and after a several year drought, India recaptured its rank as the world’s largest gold consumer – providing solace to those waiting for a synthetic floor and stability in the gold price.
Then, in the early days of February, everything seemed to change. Gold, wandered aimlessly, it lacked direction and panache. It started to lose its safe-haven appeal dropping $70 per ounce in a matter of 10 days despite the news Australia last week, reported its highest level of unemployment in over a decade. In spite of the headlines reporting China’s January CPI estimates having stalled to a five-year low while its money-supply has plumed fresh lows.
Notwithstanding the stalwart Germany saw its January CPI fall deeper than forecasted while the Swedish Riksbank joined the negative yield camp and announcing a bond buying program of its own. All the while, U.S. retail sales disappointed again in January while jobless claims crept up a bit more than expected. Meanwhile, we debate over oil stabilization, the Fed “lift-off” date, Greece, Ukraine, not to mention the long list of other civic disruptions. Though we argue over the seemingly paltry 2014 fourth-quarter earnings season and whether the strong dollar has smothered the virtues of cheap oil. All this and gold has the unmitigated gall to go down!
Thursday, gold’s price action is pointing to perhaps yet another expansion in risk appetite. One that recognizes the various and sundry risks surrounding us but favors a positive outcome for now. One that is comfortable with diverging monetary policy, one when the Fed does raises rates (many expect that to come in June), it will be a very long time before the real cost of money is materially positive allowing more time for equites and, to an extent bond yields, to rise. At the end of the day, U.S. monetary policy remains a cross over golds head.
I began in this business during the summer of 1982 and, within that 32-year period, well over half of the S&P 500 stocks within the index on my very first day have been removed due to business misfortune or failure.
This is a stunning statistic and refreshes my memory that while some market spells or situations may seem obvious or foreseeable with the subsidy of reflection, in all likelihood the failed company’s management, its board of directors, research analysts, and its shareholders all strongly trusted in its long-term success. What happened? How could an S&P 500 company – with such a regular occurrence – go bust?!?
Whether it’s golds next move or a failed blue-chip company. It’s clearly something no one could see - it could’ve be a ten standard deviation event, something that is likely to happen in once in more than a billion years and yet it happens once in every five years or so.