Welcome back from the long weekend (or perhaps even the long summer). We are basically flat to prices from the first of July, and volatility has been coming off accordingly. As the new school year begins, we have new opportunities, but the low volatility regime is likely to persist for a couple more weeks as of yet — with the Sep. 20-21 FOMC meeting as an interesting potential catalyst.

Ignoring any sort of Fed forecasting, the big question to me is actually why isn't gold down more? Open Interest in futures is down 15 percent from peaks, ETF holdings is down 4.5 percent, listed options open interest is down 7 percent, yet prices are down only 3.5 percent from July peaks.

We'll look at it more in depth in Chart 2 below, but this is a dollar story. The USDJPY in particular continues to be the best indicator for sustainability of moves. Further upside in gold (>$1,350) will likely require USD weakness below 100 against the Yen.

Bull Case

  • Easiest way to derail the dollar rally will be for the Fed to do another dovish disappointment in their September statement in a couple of weeks or set the table accordingly this week.
  • Still a massive amount of negative-yielding sovereign debt in the world, if a bit less than from two months ago.
  • Bullion sales were better in August versus July. Private mint volumes up double digits but U.S. mintage barely budged. Mostly derivative of the drop in silver spot.
  • Let's be honest: A dovish disappointment is the most likely scenario for September Fed.
  • Econ data has actually turned back toward disappointing in the last week or so after mediocre NFP among other things.
  • Call skew premium over puts has come well off of the highs. Unfortunate for gamma/vega sellers, but removes some of the upside barrier for gold from delta hedgers selling every rally.
  • North American scrap gold supply is off some 15 percent or so on a daily basis since the July highs.

Bear Case

  • Aggregate Global YTM is actually turning higher, led mostly by U.S., European and Japanese debt oddly enough. Weighted average is 1.34 percent up from 1.20 percent July lows.
  • Commodities are broadly having a tough go since the beginning of July and while gold has held up generally well on its own, there is some cross-contamination to be sure.
  • Rumors of producer hedging are trickling through.
  • Institutional physical premiums are still very poor, indicative of plenty of physical supply available.
  • Are managers getting more comfortable with equities as a yield generator? Further rotation into equities will increase risk in the system but may decrease haven appetite in the interim.
  • Though flat for a couple of months, gold is still off to the best start in 30 years on a price performance level. None of the bullish case is a surprise any longer.

Chart 1

In which I pretend to be a technical analyst. Resistance seems to be coming in from a downward sloping 50 DMA at 1,338, but that is being tested right now as we go to print. Last week, we saw yet another firm defense of the 1,303 level from the last two lows. There is a downsloping trend of highs stemming back to July as well.

Chart 2

All about the dollar. Any breakout is likely to require a tailwind from weak dollar. A lack of momentum, however, can in itself become costly for gold if the general theme of the conversation changes.

Chart 3 (Bonus)

As mentioned above, this is Aggregate JPM Global Bond Yields. Anemic in any case, but 10 percent better yields off the lows is a start.

Coin Toss

We seem to be in for another couple weeks of range-bound trading and likely, lower intra-day volatility within that time period as there aren't a ton of red flags on the calendar. Given the moving average resistance and performance year-to-date, my bias for a move is clearly still to the downside, but we have seen some short covering rips in the last week or so to keep us from falling asleep at the wheel.

Break the 50 DMA to the upside, and things can get interesting.