Gold: Options Expiry Mouse Versus Asian Tiger

Is sizable QE tapering really going to happen?  Perhaps, but the Fed has based the implementation of tapering on a consistent drop in the employment rate, and a steady increase in the housing market.

 

Horrifically, one of the two drivers of the “taper caper” may be close to incinerating.  “The Mortgage Bankers Association projects a decline in mortgage refinancing volume from $1.247 trillion in 2012 to $973 billion this year, and to plunge to $388 billion in 2014. The MBA expects total mortgage loan origination to decline from $1.750 trillion in 2012 to $1.592 trillion in 2013 and $1.091 trillion in 2014.” – CNBC News, September 24, 2013.

 

The numbers being projected by the Mortgage Bankers Association are ghastly.  If the mortgage origination and “REFI” markets suffer a collapse going into 2014, any tapering that occurs during that collapse could arguably be called the work of a madman.

 

Fed presidents Dennis Lockhart and Bill Dudley made public statements on Monday.  They expressed serious concerns about the health of the US economy.  I doubt that Ben Bernanke wants to go down in history as the madman who caused a new global markets crash.  

 

Having said that, the gold price continues to decline, albeit modestly.  Many gold investors are rightfully frustrated, after watching gold stocks give up all their “no taper” rally gains.

 

 

I think the key issue causing this situation is comex gold options.  The next key expiry day is September 25.  

 

Gold often tends to decline as options expiry approaches, and I think that is the main short term price driver of gold right now.

 

In the big picture, Chinese & Indian demand is probably the most powerful driver of higher gold prices.  It’s important not to make decisions that affect your long term core positions, using events like “options expiry day”.  

 

On that note, the just-announced clarification of the 80-20 gold import rule, by the central bank of India, is a critical victory for the bulls, in my professional opinion.      

 

 

You are viewing the daily gold chart.  From a technical standpoint, I don’t see anything to be concerned about.  From the lows in the $1180 area, gold surged about $250.  

 

As it arrived in the $1410 - $1430 area, sentiment became overly-bullish.  I labelled $1425 as key sell-side HSR (horizontal support & resistance).

 

It’s true that the black uptrend line “broke”, but by the time that happened, gold had already declined to about $1360.  That trend line probably isn’t as important as the bears think it is.  

 

Tactically, gold enthusiasts should now be light sellers at $1350 and $1425, and decent buyers at $1266 and $1200.  

 

Note the position of my gold stokeillator at the bottom of that chart.  It is heavily oversold, and flashing a crossover buy signal.  Once options expiry day is over, I think a nice gold rally is very likely.  

 

 

That’s the daily silver chart.  After completing a small head & shoulders top, silver declined slightly.  

 

It’s now approaching key buy-side HSR in the $20.75 area.  Note the action of my stokeillator, at the bottom of the chart.  Silver enthusiasts should have buy orders in that general $20.75 area.

 

If gold surges out of an “options expiry day hole”, silver could perform even better.

 

 

What about gold and silver stocks?  You are looking at the six month chart for GDX, and the gold bears are afraid there’s a head and shoulders top formation.

 

I think it’s just a shape, rather than a real chart pattern.  The gold stock bears may be overly-focused on the price action that is likely due to options expiry.  
 

The bears are also probably under-focused on the rising demand coming out of India, as the Diwali festival approaches.  Barring government restrictions imposed on buyers, gold demand in China and India is relatively inelastic.  
 

Can consistent and growing “Chindian” gold demand be met with ETF and euro government sales?  

 

I think the answer is: No.  It can only be met with gold that is mined out of the ground, and that means the long term outlook for gold stocks is superb.  Should gold stock investors carry some short positions, to manage their emotional state, even if the long term fundamentals are excellent?  I believe the answer is: Yes.  They should not be added now, because of fear of lower prices.  They should be added professionally into price strength, in the GDX $28 - $32 area. 

 

 

This six month chart for GDXJ is a little concerning, because of the broadening action of the trend lines.  Also, it’s unknown whether there is a buy signal in play on the stokeillator, or a “flat line” event (oscillator signal failure).  Keep in mind that junior gold stocks can fluctuate wildly around events like options expiry day.

 

More importantly, when the price of gold enters the “COP” (cost of production) zone, the risk/reward ratio of gold stocks to gold bullion can soar dramatically.  If gold declines to $1266 or $1200, I’d like to see the gold community step up to the junior gold stock “buy plate”, via GDXJ and their favourite individual issues, rather than drawing arrows on charts to lower prices.  I’m not so sure that’s going to happen.  After the options expiry traders have their short term day in the limelight, I’m laying odds at 60%, that junior gold stocks begin a sizable rally!

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