Last week's combination of an impressive Q2 GDP revision to 3.7 percent (from 2.3 percent) and the Fed's Jackson Hole Symposium was enough to stem the tide of "September is dead" sentiment.

The probability of a September rate hike had swung from 55 percent in early August all the way down to 20 percent earlier in the week, before settling around 38 percent currently. Economists in most polls are still calling it just shy of a coin flip.

On Friday, we have the last Tier 1 data release before the meeting in the form of Non-Farm Payrolls, and all the market is now thinking of a pivot on what is unfortunately a noisy data point.

Bull Case

  • Support: 50 DMA @ 1131 and bottom of the Ichimoku cloud @ 1123
  • Can weak Chinese data continue to impress and spur safe-haven buying?
  • Oil volatility at 86 percent annualized last two weeks and Equity VIX near 30 drives some nervousness
  • Physical demand continues to overwhelm supply and coin/bar premiums very strong
  • Silver inventories are being drawn down, and big bars are actually going for a slight premium, supporting spot
  • DXY seems to have hit a ceiling around 96 and will require serious economic data to move higher. Could limit XAU downside

Bear Case

  • Sept. 17 looms large on the horizon
  • Lower highs and lower lows trend still firmly in place
  • Put premium over calls as thin as we tend to get, and is often indicative of a top
  • We are six weeks past the all-time lows in positioning from July 21, and the short covering has continued, but the scale has been generally disappointing
  • ETF has been weak and a consistent source of selling
  • Resistance: 100 DMA @ 1162 and top of Ichimoku cloud @ 1155
  • 50 percent retrace of the 10 percent drop from June 18 (1205) to July 24 (1077) is firmly at 1142. I view that 1142-1150 as a gravitational pull for now.
  • As COMEX rolled to December contracts, all of the Open Interest leaders are calls
  • Gold's safe haven status in doubt? (Bloomberg)

Chart 1

Put/call ratio not yet screaming sell, but is biased that way. Short-term cyclical reductions in the put premium (white line, shaded) of 25 delta 1 week risk reversals is a big leading indicator for a market that is perhaps a bit too bullish.

We still have a good ways to go before parity, which is the clear Mendoza line, but it is definitely not a bullish sign that the market has been buying so many calls of late. Way less short covering on the moves higher. I have highlighted similar periods with the colored rectangles. Consider the price performance of gold (yellow) after similar peaks in call rallies.

Chart 2

Disappointing short covering so far. For having been six weeks since the Comex Gold positioning went net negative (among managed money), we have not seen a huge change. These short covering rallies can last as long as three months or so, but more frequently of late seem to run out of steam before then.

We have regained the 10-week moving average (not pictured), but not the 50. If short covering is done, it's likely that so is this several-week rally.

Coin Toss

10-year treasury yield has taken the baton and is incredibly strong correlation with gold at -.85 on a rolling 10-day basis, but EUR and DXY still cover much of the intraday moves at around 60 percent. We expect somewhat range-bound until the Friday data, and then all bets are off as a proxy for the September meeting. Lower.

Football season is almost here, and there is lots to be excited about. Best of luck.