Monday, September 7, 2009

Biweekly Global Market Review: Gold's Rally=No Confidence in Safety Currencies?

Introduction: In General, Stocks Lead, Commodities and FX Follow

Global stock markets continue to set the overall direction for commodities and currencies markets, though gold was a notable exception which we'll discuss below.

In the below chart of the S&P 500 index, an experienced market observer can see the overall direction for most other major global asset markets.

Typically, global stock markets move in the same overall direction, though not always on a daily basis. The same goes for commodities, as well as their related "risk currencies" the AUD, NZD, CAD, and EUR These are currencies that tend to move up against the safe haven currencies (JPY, USD, and CHF) when market sentiment is upbeat and anticipates growth, and move down against these when stocks and commodities are dropping due to market pessimism about future growth.

Market Diary: What Happened Since Our Last Biweekly review

The S&P 500 Index: Gives the Overview Since Our Last Newsletter of 8/24


Chart Courtesy AVA FX

Other major global stock indexes in Asia and Europe followed the above direction. August finished with tight, trendless range trading reflecting the lack of market moving news and low volumes as traders enjoyed summer holidays.

September, which is historically a losing month for stocks, opened true to its reputation. Whereas the rally since March has been a case of markets focusing on the positive news while ignoring much that was negative, September 1st saw stocks mysteriously dropping on high volume despite a relatively good news day, as if traders might have decided the rally was overdone and it was time to take profits. Some analysts suggested that the selloff began when positive PMI data did not spark the expected move up, so traders decided to take profits. Maybe.

Currencies and commodities followed accordingly, with only the safer-haven currencies gaining against their riskier crosses. As the above chart shows, the S&P decisively broke its up trend line from mid July, as did the Nikkei, crude oil. Most other major markets either broke or came close to breaking similarly established trend lines.

Since September began, most risk assets (stocks, commodities, and related risk currencies) have either recovered some of their losses or stayed flat.

Gold Shines

Gold has been the shining exception. While it dipped with the overall market on September 1st, the next day it began to soar from below $950 to nearly $1000 on September 3rd, a roughly 5% move.

Chart Courtesy of AVA FX

With about 1:100 leverage, those who caught this move made 500% percent in 2 days. For example, with just $1000 committed to this position on Sept 1st, a trader would control about $1 million of gold, and a 5% profit would be $50,000 in just 2 days.

Over the past few years, gold typically rises due to demand for it as:

• An inflation hedge, when optimism about recovery and the inflation it is expected to bring

• A safe store of value when there is fear that currencies or financial systems are in danger of collapse

• A dollar hedge, because gold is priced in USD, so when the USD drops, gold rises

On September 2nd, gold began rising fast when disappointing US ADP non farms payroll data (a leading indicator of the more important US government non farms payroll and unemployment rate report to be issued that Friday). Most expected gold to fall, since rising unemployment suggests less growth and inflationary pressure. Yet the opposite occurred.

No convincing reason has yet emerged to explain the extent and timing of this move though reasons given include a sudden surge in demand for an inflation hedge, safe store of value, or dollar hedge, though there was no news or technical analysis event that coincides with the timing of this move, leaving us to believe the real reason is as yet unknown.

Some, including this author, speculate that it was a combination of low liquidity and one or more large Eastern or Mid-Eastern sovereign wealth (aka government) fund fearing that the September 1st drop was the beginning of the next move risk assets and sought a non-currency haven.

Was this a massive no-confidence vote in the JPY, USD, and CHF?


In sum, with many risk assets like the S&P and crude oil at 10 month highs, we suspect that traders would be wise to plan for playing a pullback in risk assets and some kind of bounce in the USD, JPY, and CHF. However, given the move in gold, we wonder it gold may be taking a more prominent safe-haven role. We just saw gold make a roughly 5% move in the space of just two days, and saw an example of how 1:100 leverage can turn that into a glorious 500% return in just 2 days.

This is exactly why AVA FX strives to provide such a diverse range of trading instruments. While other markets are struggling, our clients can always find a bull market somewhere

Disclaimer and Disclosure: The opinions expressed do not necessarily reflect those of AVAFX. The author  holds positions in the above instruments.

1 comment:

  1. I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.