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.
Inflation was also on the minds of the Bank of England’s policymakers, but more like the flower garden variety thereof (1.5% by the end of 2012). Commodity price-inflation has pushed short-term British inflation levels to well above the 2% target (3.1% in September as a matter of fact).
However, such a development is also possibly indicating that the BoE’s likelihood of continuing to mimic the Fed (with more easing) is shrinking at this juncture, unless, of course, “outside” events (from the global or eurozone economy) dictate a different course of action.
Much attention will now be directed at the G-20 summit in Seoul. U.N. Secretary General Ban Ki-moon stated (in a thinly veiled reference to currency wars) that “We cannot afford to think narrowly about development and economic growth ... all countries and all peoples have a stake in the management of the global economy. The voices of the vulnerable must be heard." Despite such calls for coordination and cooperation, currency market pundits do not expect specific targets or guidelines to be contained in tomorrow’s summit summary statement.
There certainly will be no shortage of attention being paid to these markets by hot-to-trot ETFs for the foreseeable future. Perhaps, too much of a good thing, all of this ‘attention.’ The Kaufman Foundation says that ETFs are a bigger threat to market stability than high-frequency trading has been (and we all know what kind of market ‘event’ that type of activity led to recently).
“ETFs are radically changing the markets, to the point where they, and not the trading of the underlying securities, are effectively setting the prices of stocks of smaller capitalization companies, or the potential new growth companies of the future,” said Harold Bradley, Kauffman’s chief investment officer and co-author of the report when questioned by Marketwatch.
Do not- for a minute-think that such cautionary observations apply only to stock-oriented ETFs; not at a time when we have (essentially) off-exchange hoarding of certain metals (see silver/platinum/palladium, at a minimum) and other commodities engendered by the rise of the ETFs. Yet, certainty about continuing gains in any niche being currently impacted by ETFs remains absolute.
Not so fast, advises Barry Ritholtz in a Bloomberg opinion piece on…certainty versus uncertainty. Just two days ago, absolute certainty reigned in gold forums about a return to a gold standard, while others, vehemently disagree. We do not need to rehash the certainty about $X,000 gold – it’s all too well known.
For those willing to consider what Mr. Ritholtz has to say, there are valuable take-home bits of food for thought in his perspective. Consider: “Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.
“Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?
“History teaches that whenever the opposite occurs -- when certainty overwhelms uncertainty -- the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster.” Sound familiar? You bet. Make your bet(s), while considering the above. You can thank the man later for keeping your eyes (and mind) open and your head at sea-level.
Reporting from above cloud level (on yet another flight),
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America