Gold experiences greater volatility

Things got interesting in a hurry yesterday afternoon, following a rather expected rally in the oversold US dollar and following the raising of margin requirements in silver trading on Comex. The new ‘game’ became a proposition best suited for roller-coaster addicts as accelerating volatility buffeted both the yellow and the white metals in a fairly violent manner.

Suddenly, a $44 range for gold and a $3 price band for silver became a reality for participants to have to deal with (not to mention the $70 span in platinum and the $72 price spectrum in palladium). Look for more of the same as the arrival of ‘that time’ (the time when the Wall Street Journal plasters a gigantic-sized font headline blaring “Gold Vaults to New High”) has finally validated that which makes market contrarians go into full red-alert mode.

Standard Chartered Global Research issued a forecast for an environment where a string of coming Chinese rate hikes, coupled with the Fed’s IV drip of a QE2 (in lieu of the massive, full trillion dollar-sized easing and an open-ended timetable) plus rising US bond yields conspire to derail the fully-vertical rise in bullion and trigger what the firm calls a “major correction” in gold along with a serious rebound in a “very oversold and unloved US dollar.” Don’t know what ‘major’ means at this juncture, but it certainly does not entail measly $50-magnitude moves –given what has already taken place since August.

Never minding the cautionary signals, the bulls dusted themselves off and went to “work” (on prices) once again this morning, recapturing the round figure price flag at $1,400 (briefly, and on the offer side of spot prices only) in early post-opening market action, despite the steady conditions in the USD index (last seen holding 77.75). No reason not to expect wide-scale moves once again today (as well as tomorrow).

Ask any number of traders (we did) and they will readily admit that the direction (and size) of said moves is extremely hard to ascertain. Such price guessing-games now also come with it a level of nervousness/uncertainty that suddenly takes every formerly minor price-impact factor and makes sure to include it in the ‘what if’ scenarios because anything at this juncture could either trigger buying melt-ups or selling avalanches.

To wit, last night’s palpitations-inducing swings in gold/silver/the dollar were explained (not) by NineMSN as follows: “Many in the market appeared confused by mid-session gains in the U.S. dollar index, which was up 0.9 percent at 5:04 p.m. Unable to discern a clear reason for the dollar's rise, dealers began to look closer at COMEX silver, where preliminary trading volume was over four times its average.” Maybe, maybe not. You figure it out, if you have speculative money still left to burn. It remains hard to fathom that all of what we have seen of late will end “well.”

Silver opened with a 69-cent gain and a spot bid quote at $27.64 per ounce. Platinum fell $2 to the $1,759.00 per ounce mark, while palladium climbed another $16 to turn back towards $705.00 the ounce. Trading focus quickly shifted to US jobless claims data as it indicated a drop of 24,000 filings last week.

More importantly, the four-week average of initial claims declined to 446,500 – the lowest level in two years. Good enough for an instant 0.15 adrenaline shot to the greenback on the trade-weighted index. Following that, the Commerce Department reported that the US trade gap narrowed in September as the declining dollar made life easier for the nation’s exporters.

This, while China’s still-ballooning exports (and resulting massive trade surplus) prompted officials to hike reserve requirements for the country’s biggest banks. The government has already criticized the US for its latest round of easing and for ratcheting up the threat of inflation that could result from the swollen streams of cash pouring into China. Reserve requirements were raised by 50 basis points but many (see Standard Chartered above) see a steady string of similar moves in the pipeline from Beijing.

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