Gold technically eked out an "up" day Monday, closing about $2 above where it opened (depending on how you measure a close), which ended a streak of eight straight losing days. March was the last time that had happened, and 10 times in a row never happens. Ever.

If you're wondering, March was followed with a massive short covering rally and then entered a three-month period of sideways trading all due to the "will they or won't they" regarding Fed rate hikes. We are unlikely to repeat the same pattern given the implied certainty of rate hikes in a sooner period (five weeks to Dec 16), but the rally in particular is interesting, and any weak data releases will immediately have traders second guessing themselves.

Bull Case

  • Market selling seems fatigued.
  • RSI is flashing oversold still on a daily level, even after last two days of respite.
  • EFP moved into strong backwardation against December contract (roughly $1), so spot well bid over futures.
  • Put skew strongly in market, so plenty of downside insurance being bought. Slows down the big drops.
  • Huge support in the 1077-1080 spot level from the long-developing July lows.
  • Down $100 in spot gold from October highs. It either turns, slows down or leaves a big crater in the dirt when it hits zero. Zero is highly unlikely.
  • Equity uncertainty came roaring back yesterday. U.S. markets dropped and VIX popped 250 bps.
  • Physical demand strengthening and producer sales have slowed.

Bear Case

  • Silver positioning has not normalized like GC and remains very long. Silver gets double whammy in face of higher rates as both cost of carry/opportunity goes higher and industrial demand likely diminished.
  • ETF holdings rolling over (more in Chart 1), down 27 tons last week.
  • Lower highs, lower lows trend still firmly in place YTD, breakout ran out of steam in mid-October amidst improving data.
  • Yields have seen massive rally and the two-year mark is at highs not seen since H1 2010 (88bps). Long rates, are much less exciting.
  • 68 percent chance of rate hike in December is the highest I've seen since the financial crisis. This is likely a self-fulfilling prophecy, but the market can also Chicken Little their way out of this.
  • Econ surprise has clearly turned to the upside, driven largely by last week's bumper NFP number, which beat every single econ estimate.
  • Strong USD testing highs not seen since March and nearing the major psych level of 100 on DXY. GS has calls out for EUR/USD parity.

Chart 1

ETF holdings have rolled over and are now at lows not seen since 2008. For comparison, the spot price of gold around that time was about $870, which coincidentally, is also within range of a price that comes up when you look at implied mean reversions from XAU/XAG (60x = $900), crude (13x = $598), broad commodities (5.4x = $550) and EUR (658x = $705) though S&P 500 implies higher (.63x = $1,309).

Considered from another point then, why the outperformance? Few in the market would tell you that the last four years feel like outperformance for the yellow metal, and yet most any cross-metric we can produce says it has held up quite well (that S&P exception noted). Central bank and retail physical buying provide some answer, but PBoC purchases were actually less in that period than many thought (less than 1T per day), and Indian physical demand in particular has been disappointing for a weak monsoon season.

Chart 2

Gold commitment of traders tells the story of a record liquidation of net long positions leading up to last Tuesday's data recording, which was of course before Friday's strong Non-Farm Payrolls print and some of the nastiest selloff. Interestingly, aggregate open interest since the data has actually risen (orange line) on above-average volume (blue bar chart), implying perhaps that somebody is beginning to add either long or short positions since then.

As CTAs tend to be more momentum traders, it's entirely possible we have swung all the way back below the moving average position to the bearish side (yellow line drop below green line in the middle portion), therefore negating any further expectation of long liquidation.

Coin Toss

The last two days of sideways trading may give some courage to those looking to catch the falling knife, and tech levels are saying we are oversold. Combined with positioning data having swung so much for gold and the options market back to its bearish stance and the EFP being sold, I am looking for a bounce off the lows.

I have tepid expectations for price action in the face of a likely December hike, but I think rates, USD and Fed Funds Futures may have run a bit too far. Higher.

While we're at it, I’ll go on the record and say the first hike will be a sell-the-rumor and buy-the-news event for metals as the reality of a long, slow hike cycle and negative real interest rates will prevail after the initial they-really-did-it shock wears off.