Date: Fri Sep 02 2005 12:49
trotsky (@what has changed) ID#248269:
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we don't know yet whether the Fed will REALLY stop raising rates, but what has changed is the market's perception about rate policy in the wake of Katrina.
FF futures have priced out two rate hikes that were previously thought to be a done deal, while lowering the odds on the one hike ( September meeting ) remaining. consequently, the yield curve is - for now at least - back in steepening mode.
this is the most important fundamental driver of gold and gold stock prices, and it has now turned from unfavorable to favorable, thus the recent rally.
nevertheless, the fact remains that the participants in the gold sector are very unanimous in their bullish positioning. e.g. the XAU index option p/c OI ratio has now fallen back to the 14% percentile - i.e., it is lower than 86% of all readings over the past year. similarly, it is reasonable to assume that speculators, after briefly taking flight from gold futures on Tuesday, are back in force on the long side. sector wide put/call OI ( on individual stocks ) remains at an annual low.
otoh, money flows into the sector remain largely positive ( it's been a bit of a mixed picture very recently, but not a negative one ) , both in terms of traditional methods of analysis as well as my specialized tape-reading method. the best explanation for this is that NEW money ( i.e. from investors not previously engaged in the sector ) has found its way into it, on account of the above mentioned change in the interest rate outlook ( by the way, this is something that should be considered by those that regard gold's recent gains as 'blood & misery money'. it is NOT the disaster itself that has reinvigorated gold, it is the market's expectation of the authorities likely interventionist reaction to it ) .
all in all, it now looks like the sector is going to follow by and large the seasonal chart , with the positive factors ( a big factor is also the fact that Indian physical demand is strong, and that the WAG signatories can't sell anything for another 35 days or so ) outweighing the negatives for the duration of the seasonal strength period, probably followed by a big correction ( on account of the large spec net long position ) when it ends.
this would actuall be the optimal outcome from the long term bullish PoV, as we'd likely get a higher low by the time the cyclical turning point in November comes around.
this scenario ( up into late September, then down with a general stock market sell-off into a November/December, or alternatively late October low ) would be the ideal set-up for resumption of the secular bull market.
delving a bit into detail, the near term strongest resistance is provided by the fact that in the September series, the September 100 XAU call sports the greatest concentration of call open interest, but it seems that's not impossible to overcome, since it's only about 4,400 contracts ( conversely, the biggest September put OI concentration is at the 92.50 strike, which has just recently provided support ) . the biggest concentration of call OI by far is the December 115 strike with over 11,000 contracts open.
such a big strike usually serves as an attractor for prices ( no guarantee of course, but recall e.g. how the large call OI in the Aug. 445 call strike in the gold contract 'pulled' prices to just underneath the strike before a sell-off began ) .
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