Gold futures take an overnight breather after ripping up 2% to $1,232 an ounce on Tuesday, breaking through the strong and well confessed resistance point of $1220 an ounce. Technical traders are now curious whether the next big resistance zone - $1240 an ounce will be breached or, if this run-up induce price action vulnerabilities to fresh bouts of stale longs in the market.
The month of December has seen gold trade within a broad and volatile $90 an ounce range and options traders have definitely taken notice. Although implied volatility levels are, in aggregate, down a smidgen from two weeks prior they are still quite elevated compared to recent history. Currently one to three month implied volatility -- that’s the amount of premium option call and put buyers are willing to pay for options -- is trading in the 80th percentile, meaning one-month implied volatility has only been higher 20% of the time. Meanwhile, six-month implied volatility is quoted in the 75th percentile, while one-year options trade in the 60th percentile.
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Option order flow remains decisively bearish - currently paying more for puts as implied options skew (the price differential between equidistant calls and puts) trades in the 70th percentile. With implied volatility term-structure (i.e. the volatility differential between expiration months), it appears every month has decreased ever so slightly – with the exception for a two-year option which is up slightly.
Gold’s 2% bounce Tuesday certainly invites the “flight-to-quality” justifications. Considerable ink was spilt over China and its corporate bond policy action which appeared responsible for the 5.4% plunge in the Shanghai Composite index, or the decision by Greece to fast-track its presidential selection process, perhaps compromising any impulse of the European Central Bank with its anticipated large-scale asset purchases.
Not to mention the latest, greatest, up-to-date worries about a flattening yield curve, corporates continually trading poorly and a foretaste of next week’s FOMC meeting where rumor has it they may actually drop the “considerable time” phraseology. Consensus believes the Fed has some wiggle room to keep monetary loose, but the question it needs to address is whether a more normal economy still warrants crisis-level interest rates?
With the benefit of retrospect, the staging of Tuesday’s rally was cast when reaction to the no-vote in the Swiss referendum saw gold slide to a three week low of $1,146.75 an ounce as trade opened in Asia Monday December 1. However it eventually swung higher across the board amidst feverish short covering across gold, silver, and platinum.
In addition, net exchange-traded-fund holdings improved by 1.5 tons last week as a diffident rise in spider gold holdings offset trade-ins elsewhere. Retail investment demand continues at an invigorating pace thus far with American Eagle sales by the US Mint running at a solid 72,600/oz. clip.
The most recent trade figures again point to an abrupt wake-up call from the jewelry industry as gold imports into Turkey – a chief jewelry manufacturing center – soared to a six year peak in November. Imports to Turkey totaled 46.9 tons last month – the highest level since summer, 2008. China is looking to relax imports restrictions according to believable newswire reports. The People’s Bank of China recently dispersed a blue-print of sorts permitting “qualified” mine companies as well as banks that are members of the Shanghai Gold Exchange to become importers.
If this looks too punchy, would be Chinese importers point to precedent as this formula has worked elsewhere. The move, coupled with recent relaxations by India, again insinuate prices will remain somewhat shielded from downside pressure as gold moves towards a quirky manifest destiny from west to east. After years in the back-drop, it appears consensus is gearing up for the Asian markets to once again increase their influence on the gold price.