Metals Thoughts: 1 hike to rule them all
Tuesday, December 06, 2016
We seem to have settled in just a bit over the last couple of weeks, and while the downtrend since the U.S. election is still in place, we have had a few days respite from the selloff and seem ready to challenge the downtrend to the upside.
So far, gold has tested and rebounded the $1,170 support that stems back from mid-2015 bottoms, and U.S. rates seem to be taking a breather, with the 10-year stuck around 2.4 percent and DXY hovering north of 100. We are only eight days from what is almost certainly the long-awaited dovish hike from the Fed, and we are more than academically interested in what the commentary and interpretation around the event will be like.
- Gold slightly oversold with 14-day RSI maintaining the 29 levels that have been consistent throughout November and early December. October's dalliance with "oversold" brought about a $40 rally.
- Extreme put skew (15d 1m RR -4 to -2.5v) has eased somewhat, which has a decent correlation with short-term lows historically.
- Silver may begin to outperform gold again with banks tripping over themselves to upgrade industrial-use metals.
- Economic data is not yet great but can easily be considered good across the board. A "high-pressure" economy may be here before we know it.
- Counter to what I had previously thought, the net delta of options open interest in the market is actually negative. Calls may be more popular, but they are deeply out of the money. A lot of insurance purchased on the gold market has profited nicely.
- Not a lot of futures spec longs left to liquidate, as we have returned to more sustainable long-term levels.
- Still holding downtrend from post-election hysteria. Resistance from top of trend is currently around $1,180-$1,185.
- S&P 500 VIX has gotten crushed below 12, threatening the lowest levels of the year. Not a lot of risk-haven seeking in that sort of environment.
- Gold ETF outflows are the only thing more consistent than Dak Prescott. Down roughly 8 percent from peak levels (election night).
- December 14 rate hike is practically inevitable at this point.
- Inflation concerns do not yet seem to be bullish for gold based on what we have observed from headline releases and the follow-through moves. Long-term development.
- The OPEC cut agrees to a level that is 1 million barrels per day above what they were producing in January. With a steep contango curve (over $1 January-February) and U.S. production coming back online, we may have seen the end of our oil tailwind for the commodity complex.
We are roughly in the top 10-20 percent of bullish surprising econ data as a broad indicator since the Great Recession. An important caveat: We have been here before and obviously failed to achieve "escape velocity," but broader indicators like the Atlanta Fed's GDPNow indicator (not pictured) are also giving bullish signals.
A 4.6 percent U-3 rate and even 9.3 percent underemployment rate indicate that the Fed's strategy of a high-pressure economy may manifest itself quicker than many anticipate. It will be interesting to see the transition from accommodative monetary policy to a supposed era of accommodative fiscal policy in the U.S. among infrastructure spending, all while the ECB tries to quietly get off their own QE train.
The last two years, in pictures. The white line is JPM's estimate of global weighted aggregate yield for sovereign debt (inverted y-axis). The visual correlation with gold prices is unlike most any other indicator I have found.
Since the start of 2015, there has only been a roughly six-week period of divergence between the two, and that gap eventually closed. It makes sense as well from a fundamental demand standpoint: As negative yields became pervasive throughout developed nations, gold has a negative opportunity cost, making it effectively a yielding asset. Put simply, "I don't have anything else to buy, and the money markets are charging me, so ... gold!"
As that trend has faded, we have seen the $200 drop from $1,360 to current levels. As gold has outperformed this year versus what you would expect with the backdrop of dollar strength, ETF liquidations, futures net positioning, weak jewelry demand and a practical removal of India from the demand markets, this may be the straw that breaks the back.
If anything could push us south of $1K spot prices, it would be higher global rates.
With rates, risk and dollar taking a breather, we have some moderate bullishness here, especially if we break the immediate resistance from the downtrend at $1,180-$1,185. Support at $1,165-$1,172 now means for a tight window. Busy slate of Tier 2 econ data between now and Dec 14, but could go quiet with the Italian vote over with. Higher.
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