This gold rally has been as orderly as the March of the Penguins — straight line, all participants headed north. And a shocking lack of volatility — the brand new CBOE/Comex Gold Volatility Index settled around 19 after its first day of trading.
When you ask traders why the price is still going up, you get the same story — lots of buyers, no natural sellers. The traditional sellers in this market — mining companies and in recent years, central bankers — have turned hoarders. And with the advent of ETFs, investors have an easy way to get long.
Looking for a catalyst to a big move, I asked Lou Grasso, trader at Millennium Futures what could happen in the gold market if the Fed initiates a second round of quantitative easing tomorrow. “If you get QE2, you could see a rally but, don’t think the market will sell off if there is no QE2”.
Next week, Kevin Grady, gold trader at Man Financial tells me traders are watching October gold options expiration on Monday. Out of the money calls are where the action is indicating the bias is still up. Kevin is expecting a run at $1300 in the spot market but says, “first time up, it’s probably going to fail”. Strikes to watch: $1295 and $1300 calls.
Not everyone is bullish. Jim Paulsen, Chief Investment Strategist for Wells Capital Management has sat out the rally and says, gold is overdone.
“One of the problems I have with it is ‘gold is the answer to any problem which keeps you up a night’. That is, worried about inflation? Buy gold! Deflation? Buy gold! Deficits, Euro crisis, flash crashes, run on the U.S. dollar? Buy gold!” But, no near term catalyst for a big sell-off, more of a slow grind reaction to improving economic fundamentals may eventually shift the bias away from the “fear trade”.
Orderly commodity markets are an oxymoron — watch for a catalyst to move this market much higher or, much lower.
- Track the CBOE/Comex Gold Volatility Index
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