From the May 2014 issue of Futures Magazine • Subscribe!

Metals giving mixed messages

Metals aren’t simply another commodity sector, they say a whole lot about where the global economy is going. Metals are the foundation of economic growth, and precious metals, gold (COMEX:GCM14) in particular, can be a window to our souls. 

Besides being used as a currency and store of value when inflation fears rise, gold is the original fear gauge, in high demand when the world seems uncertain and at risk. “Gold for 5,000 years keeps its value,” says George Gero, vice-president of Global Futures RBC Capital Markets and long-time gold trader. You can’t trust many currencies so people like to have some gold because it is portable, liquid, holds no allegiances and is instantly convertible to other currencies.” 

Gold is the most followed and globally traded commodity. That is if it were a commodity. Some call it a precious metal—and it is a lonely one, perhaps the last precious metal—others see it as a currency, the only one that maintains its value—and until we find a real life Rumpelstiltskin able to spin straw into gold like the fairy tale as easily as central bankers can print money, it will remain in demand. 

However that demand waned in 2013 (see “Where’s the inflation?” above). This came about as the huge increase in inflation expected by so many analysts (based on the massive global stimulus programs from central banks in response to the 2008 credit crisis) did not materialize (see “Where did the stimulus go? below). 

And Gero says traders are abandoning gold positions, which is evident from lower open interest. They keep on buying out-of-the-money calls. Years ago the mining company used to sell forward and buy out-of-the-money calls, but now the miners are selling calls and using the proceeds to buy puts, according to Gero. “We have 1.5 million in open interest in options and only 303,000 in open interest in futures. That is showing me a lack of interest in gold.”

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