Summary
December Gold settled at $1,.757.30 per troy ounce, a loss of $104.00 for the day.
Market Recap:
EDIT: The CME Group just announced an increase in margin requirements (see here), effective tomorrow. It seems quite likely that today’s selling was driven by some advance knowledge.
Gold futures plummeted more than $100 on Wednesday, extending a dramatic two-day pullback that saw bullion trading at all-time highs of 1917.60 only this Monday. Today’s selling was technical in nature, and momentum-driven, with some notable acceleration off the GLD open. From there the profit-taking only intensified, as longs watched earnings evaporate, they hurried to preserve what gains they had left. Gold has attracted a dramatically larger retail presence over the last year, illustrated most vividly by the SPDR GLD’s recent ascent to being the largest ETF. We suspect that weak hands do not have the stomach for this type of move and the large corrections the metals markets are known for historically. This may have aggravated the scope of today’s selling, which was unusually aggressive in many ways.
Volatility was firm throughout the day, with puts increasingly bid during the sell-off. Call owners liquidated all the way down, with large volumes of the September 1800 and 1900 Calls, the October 1900 and 2100 Calls, and the December 1850 Straddle being sold. Other market participants preferred buying downside protection through puts. Skew moved aggressively toward the puts, with fences in October and December shifting more than a dollar in premium from calls to the put. Volatility was offered extensively after the Comex close and futures began to stabilize.
Directional Commentary:
Options: Today’s option activity was largely reactive, with speculators liquidating Calls and in some cases, purchasing Puts. Yesterday we said options suggested volatility would come in and while today’s activity after the close is consistent with this the $100 down-move was more of a surprise. Under normal circumstances we would expect volatility to contract aggressively if the market trades any direction but violently lower. Speculation (and fear) about Ben Bernanke’s conference at Jackson Hole are likely to mitigate this tendency. Options sentiment is bearish. Conclusion: Bearish
Technical: December Gold sold off violently on Wednesday, accelerating through support in the 1810-1825 area and closing down $104 on the day. This correction is very bearish and is likely to prompt testing of the 20-day moving average at 1738. If successful we could see further selling all the way through the 50-day moving average at 1620. We previously mentioned support at the 1720 area but in light of the gravity of today’s move (which broke through several minor support levels almost effortlessly) we think it will be less of a deterrent than we did previously. Should futures stabilize, we are likely to see the return to a wide trading range. Long-term technicals remain quite bullish but we do not think short-term selling has found a bottom yet. Conclusion: Bearish
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