>Call option rumours light gold fuse
By: Tim Wood
Posted: 2002/02/26 Tue 19:17 EST | © Miningweb 1997-2002
PRINCETON, NJ -- The COMEX April gold contract closed at $298.20 an ounce, a $5.3 gain over the opening price as traders tried to price in a number of factors including speculation that America is on the verge of launching an attack on Iraq, the Bank of England's final auction, US interest rates and investor activity.
Spot gold closed the New York session at $297.50 per ounce after the London fixes of $292.50 (+$1.90) and $294.20 (+$3.60) for the morning and afternoon sessions respectively. The August contract closed above $300 an ounce.
Gold bugs were excited by news filtering across electronic networks that an unknown investor had taken a bet on the gold price with a "significant" quantity of short-dated COMEX call options with strike prices at $300 an $310 an ounce. The information could not be verified independently although Reuters carried similar information today.
The call options, whether rumour or fact, are important in the context of next Tuesday's final gold auction by the Bank of England. The previous auction was subject to a sting operation that created a buying vacuum before the hammer dropped.
Today's activity may be a variation on that theme, with the speculator mixing it up in order not to leave a particular fingerprint. It's not clear what advantage roiling the market would have so far ahead of the auction, save for one key factor – surprise. The speculator had it previously and he possibly has it again. Indeed, he may now have no particular agenda beyond creating uncertainty and additional volatility in order to raise trading volumes.
There is certainly no real point driving the price up in a way that makes shorts so nervous that they start to cover and look to the large volume coming through at the auction to cap any additional exposure, should it be necessary. Of course, if gold bulls made a concerted effort to squeeze shorts all the way into, through and after the auction, then those calls at $310 could be rather conservative.
Risk is the watchword since $300 an ounce seems to be the trigger for loose lips at the central banks; and we know what loose lips do to a ship full of gold. The Bundesbank is unlikely to launch another sneaky torpedo against the gold price, but it is highly probable that another bank will be itching to take Britain's place in the sales queue.
As for the reported jitters over a sequel Gulf War, history shows that gold is not overly sensitive to wars that the US can easily win. Once the smart bomb stockpile is re-established, knocking over Iraq should be relatively swift and casualty free with no lasting damage to oil supplies. The Nymex April light crude oil contract was little changed, up 14 cents to $21.55 per barrel.
Current account
US interest rates are probably more significant in trying to develop a comprehensive view. The dollar's value remains tenuous simply in terms of the country's runaway current account deficit which requires $2 billion of capital inflows every day. It is set to reach nearly 5 per cent of gross domestic product this year, and 6 per cent in 2003 according to Morgan Stanley economist Stephen Roach.
Celebrated international economist Fred Bergsten notes that America also exports capital at the rate of $2 billion a day, "Hence, gross capital imports must reach about $4 billion daily, or in fact about $5 billion per working day, to balance the books overall. Even a small decline in those inflows would push the dollar down, inflation and interest rates up, and severely threaten the recovery in the world's only major engine of economic growth."
On an annualised basis it is equal to 15 per cent of GDP. That is impossible to sustain, more so in the context of net foreign liabilities of $2.5 trillion, or one quarter of GDP, and can only be solved through depreciation or devaluation of the dollar. The December deficit was $25.3 billion, down from November's $28.6 billion.
According to a Federal Reserve study, the devaluation trigger point for OECD economies is when the trade deficit hits 5 per cent of GDP, and the devaluation can be up to 20 per cent. If Roach's forecasting is correct (a spotty record), then the dollar will hit the wall late this year or early next. However, markets always discount in advance, so expect the dollar index to come under pressure even sooner.
That strain gives added significance to the release of money supply data on Thursday this week; after which Alan Greenspan is scheduled to speak at the National Summit on Retirement Savings in Washington. The two have events have a stronger link significance than Greenspan might care to tell his audience who will doubtless hear nothing about the curative power of gold in distressing times; such as the collapse of the dollar.
The dollar index closed at 119.78, close to last week's key resistance line at 122 which it touched briefly at the end of January and before that in July last year.
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