GO
Loading...

The odd reason why gold rose on the Senate deal

Wednesday, 16 Oct 2013 | 2:23 PM ET
apcuk | E+ | Getty Images

Gold and silver enjoyed a quick bump after Senate leaders announced a deal on the debt ceiling and government shutdown, largely on the strength of short-covering.

Many thought that a catastrophic outcome that involved the U.S. hitting the debt ceiling was gold's best hope for a sustained move higher—which left some traders surprised by gold's positive reaction to the deal announcement.

But George Gero, precious metals strategist at RBC Capital Markets, reports that gold open interest fell on the deal even as gold futures rose, meaning that traders were closing their short positions.

(Read more: Wall Street not listening to Washington anymore)

Gero said that people made debt ceiling bets by trading gold and stocks together. "One could have been a hedge against the other."

But now, with the Senate agreeing on a deal and voting about to start, "If you've been using [gold] as a trading vehicle, you want to get out, because there's no more reason to be on the short side of gold," Gero said.

In other words, if you were making a bet on gold and stocks amid the D.C. uncertainty, "You basically want to just square your book now." And for those who were shorting gold on the hunch that it would drop off of a coming deal, squaring their book means closing their short positions.

Futures Now: Gold trades on DC fears
The Futures Now crew breaks down a volatile day for the precious metal as the DC dysfunction continues.

"It's kind of a 'Buy the rumor, sell the fact,' as we say," agreed Jim Iuorio of TJM Institutional Services, a CNBC contributor. "Everybody 'beared up' on gold, thinking there would be an explosive move lower when they came to an agreement, and that didn't happen," so people simply exited their shorts.

(Read more: After sudden plunge, gold traders cry conspiracy)

Gero says gold will start to "return to basics," and refocus on such issues as when the Federal Reserve will taper under a Janet Yellen regime.

Iuorio, meanwhile, is watching the chart. "We're going to know more about gold in the next three or four days," he said. "If gold can't trade above $1,320, it's still in a very clear downward pattern."

—By CNBC's Alex Rosenberg. Follow him on Twitter: @C NBCAlex.

Watch "Futures Now" Tuesdays and Thursdays at 1 p.m. EDT exclusively on FuturesNow.CNBC.com!

Like us on Facebook! Facebook.com/CNBCFuturesNow.

Follow us on Twitter! @CNBCFuturesNow.

  Price   Change %Change
@1GC13Z
---
@1SIL13Z
---
@1HG13Z
---

Contact Futures Now

  • Showtimes

    Watch Futures Now Tuesdays & Thursdays 1p ET exclusively on cnbc.com!

Sponsor Links

  • CME Group brings buyers and sellers together through its CME Globex electronic trading platform and trading facilities in New York and Chicago.

  • Take your trading to the next level with a platform that lets you trade stocks, options, futures and forex all in one place with no platform or data with no trade minimums. Open an account with TD Ameritrade and get up to $600 cash.