Spot Gold - $1,230.65 // $4.50 // 0.37%
Gold put in its most volatile session in recent history on Tuesday. While the range for the session was not as substantial as the reversal of late July or the plunge at the beginning of the same month, the intraday swing was extraordinary. In the Asian and European trading sessions, a steady selling pressure built up behind the metal that would lead many trades to believe the steady rising trend channel of the past four weeks had given way. However, a test of the 50-day moving average and more importantly the shock of the severe plunge in US existing home sales resulted in an immediate $25, trough-to-peak rally for the precious metal. This would effectively stave off the reversal; but speculators are still wondering whether the precious metal is back on its bull track for a permanent run.
To understand the impact the US housing data had on gold (and it was clear that it was this event that would catalyze the move as the reversal occurred at precisely the time of release) we need to understand how investors interpreted the reading. This indicator is under most circumstances a low-level release when it comes to market impact. That would have been the case this time around had the investment community not already been concerned over the health of the global economy and the data itself not marked such a crippling decline. The 27% drop in existing home sales is difficult not to fold into fears that the world's largest economy is destined to stall. Most home purchases are deals for preexisting properties. These homes are more affordable, more prevalent and better for storing value. Therefore, it is quite the shock to see American's curb their interests so sharply despite low prices and record low yields for mortgages. This particular piece of data can easily depress consumer confidence and wealth - effectively cutting spending and stalling the overall recovery effort. It is the bigger implications of this data - that the global economy is one step closer to tipping back into recession - that raises the value of an already highly priced safe haven like gold. Now we will watch to see whether 2Q GDP revisions will further stoke uncertainty and demand for an alternative asset.
For the speculator, it is important to point out a few things from underlying price action. While volume on the December expiration Comex futures contract jumped to 130,358 contracts today (second to the relatively stable reversal effort on July 28th), the delayed aggregate volume reading hit its lowest level - 60,005 - since Aug. 20, 2009. What's more, an initial spike in the CBOE's Gold Volatility Index to 23% was quickly reversed to pull risk premium back to a modest change at 19.1%.
Spot Silver - $18.37 // $0.38 // 2.13%
Given the distinct divergence of gold and underlying risk appetite trends; it was a battle for silver's attention Tuesday. However, where the selling of risk-based assets was relatively moderate, gold's reversal was very unique. Ultimately, the link between the metals would take over. That being said, silver is still below range resistance at $18.50/75 and December volume is still below its highs.
Spot Gold Chart (Daily)
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Crude Oil (LS Nymex) - $71.63 // -$1.47 // -2.01%
All too often recently, we have seen the conviction in breakouts from various assets completely collapse as the obvious lack of fundamental drive or questionable bearing on investor sentiment leaves security drifting. This isn't the case with crude oil's bear wave. Though the energy market's reversal began in the first full trading week of the month and momentum has notably cooled since the strong push on the 11th, this drive has nonetheless run 12 out of the past 14 active trading sessions. And, given the most recent, five-day string of losses; there is little sign of this strong move letting up. That being said, consistency grows even more unstable the longer it persists. The desire for short interest to book profit and speculative longs to jump in on an early effort at reversal will increase should fundamental pressure let up.
At momentum, the selling pressure behind the commodity is entrenched. A wave of investor-based risk aversion and fading growth trends swept over the markets Tuesday, adding a tangible weight to return and demand dependent assets like oil. The top event risk on the day was the release of the macroeconomic existing home sales indicator for the US. While this reading is important for long-term growth forecasts, it does not typically carry the market on its own. That wasn't the case today. The 27%bplunge in pre-owned homes was more than double what was expected; and the level of turnover was the lowest on record. This 'big number' statistic is important because existing homes are the foundation of the sector (they are cheaper and more prevalent than new resident sales) and this area of the economy can drag the whole down with it. This particular report can further have the side effect of increasing traders' awareness to growth data going forward - something with which the market will have in abundance. This will affect the demand side of the market; but for the supply side, we will look to tomorrow's DoE figures for guidance. We have already seen net petroleum stockpiles hit two decade highs and a Bloomberg poll has analysts projecting a 27-year high in distillate holdings alone. Given this recent mix of data, it is hard to justify prices above $70, much less $80.
While the continuous oil contract is targeting the lows of July and May, it is interesting to note that the October expiration Nymex contract actually posted a record low close. That could encourage selling further down the curve and keep the pressure on the market overall. Also notable, we saw volume on the contract hit a record 325,614; but the CBOE volatility index was little changed.
Crude Futures Chart (Daily)
John Kicklighter is strategist with DailyFX.com.