Metals Thoughts: When the levee breaks?
Tuesday, March 21, 2017
After the FOMC hike Wednesday, we saw a nice little relief rally, driven mostly by spec short covering. The last couple of days have been quiet, with $6-$8 daily high-low ranges abounding. Implieds are getting sold with both hands, with both one-month and one-year tenors at multiyear lows.
Correspondingly, rolling 10-day correlations with DXY and JPY are back to cyclic highs at around 90 percent. That is usually indicative of a market without ideas, so we just settle into our paradigms and trade the range.
I frankly don't know what forces us to pick a direction next from here, so I understand why the front-end vols are being sold so hard, yet the one-year at near 14 percent seems cheap historically.
- The dovish hike last week went as expected, and the Fed made it clear that though we are hiking, it's still accommodative monetary policy.
- Upsloping 50 DMA beneath us at $1,221.15 and 100 DMA at $1,207.
- GBP shorts are at all-time record levels with British Prime Minister Theresa May triggering Article 50 on March 29. Long dollar back to being crowded trade and could benefit gold or anything USD-denominated.
- In the lead up to the FOMC on Wednesday, specs had dumped a whopping 50K contracts of gold in expectation of the hike. Nice recipe for the relief rally we saw.
- We are off the highs in rates, decreasing opportunity cost in long metal positions.
- The odds of President Donald Trump achieving any of his promises seems to be diminishing, perhaps investors lose confidence?
- Cyclic lows in vol (for now) seem to be a decent buying opportunity. More on this lower.
- Gold forwards at a premium to comparable treasuries has some correlation with bullish price reactions, though it's tenuous.
- Gold has stubbornly withstood stronger dollar, higher rates, higher equities and continued strong economic data. Perhaps an effective equity hedge allure is developing.
- What drives new money into gold here? Without a new vector in equities or higher interest rates, doesn't seem like much catalyst for moving asset allocations around.
- Physical demand is terrible by pretty much any metric and across geographies. SGE premium remains positive, but hard to tell how much of that is because of restricted supply access.
- $1,261 February high and 200 DMA convergence means big resistance.
- The rally in equities, doesn't appear to be from Trump. Main point: Other developed markets are outperforming the U.S. major markets. It's all about rates?
- Counterpoint to above bull case: Steep contango in both OTC and futures may dissuade some bettors from paying the carry, leaving only cash longs available for support.
Implied volatility taking an absolute dive the last few sessions as realized vol on either close-close or high-low has disappointed. We haven't yet gotten to the 2014 lows on one-year vol just below 14 percent, but at this rate, it could happen tomorrow.
Then, you need someone who's been in the market longer than me as the data only goes back to 2006, which coincidentally is the end of the rate hike cycle that is most analogous to this one. At least this is not specific to metals, as the VIX and crude vol are both suffering mightily as well.
The long-run macro is still a supportive environment for gold and silver (PGMs have some other issues). Yes, the FOMC is in a hike cycle, but real rates remain negative and this Fed is clearly comfortable with letting inflation gather some steam before becoming more aggressive.
In the interim, the long-dollar play seems tired and crowded, so is our most likely catalyst for a break, then maybe the huge short vega/gamma trade in precious goes painful? Hard to nail the timing on that, but it does feel like if there is a break, it's to the upside.
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