Gold makes a move
10/16/18

●Gold jumped last week as stocks dropped

●Gold futures broke out of two-month trading range

●Many gold-related stocks also rallied, some with heavy options activity


 

With the broad market slumping again yesterday morning, it wasn’t surprising to see one area enjoying a better-than-average day: metals and mining stocks, which were up more than 1% in the morning when the S&P 500 (SPX) was down around 0.4%.

These stocks looked like they were talking a cue from the gold market, which notched one of its biggest days of the year when December gold futures (GCZ8) jumped from below $1,200/ounce to $1,230 last Thursday as the equity market was reaching the low point of that week’s break:

December gold futures (GCZ8), 7/9/18–10/15/18. Gold price chart. More fool’s gold?

Source: OptionsHouse

Gold, which has trended lower for most of 2018, entered a trading range in August but looked like it might push out of it a month later when prices dropped sharply on September 27. But that turned out to be the extent of the down move, leaving traders to wonder whether it was a “bear trap”—a downside breakout of a trading range that is quickly reversed, leading to a larger up move—or simply a widening of the trading range.

Either way, last Thursday’s surge clearly broke the upper boundary of the trading range, which likely led many gold bulls to consider the possibility the market was (finally) turning in their favor—or that, at least, the bear trap had sprung.

Despite popular perception, gold doesn’t have a great track record of hedging moderate inflation (or functioning as money, for that matter). One thing it does often to do is jump when traders get really nervous about the stock market. The last leg of gold’s roughly 11-year bull run, for example, began at the depths of the 2008 financial crisis. Gold also turned higher when stocks broke sharply in August 2015 and January 2016.

Overall, though, since gold’s September 2011 peak, it’s been mostly sideways or lower. But last week’s stock downturn unleashed butterflies in many stomachs that were probably still a little fluttery from February’s correction.

If the recent gold pop is the product of stock-market anxiety, it stands to reason that an equity rebound will take some of the starch out of the move. That’s unlikely to begin and end with a single day of stock gains, though. Also, the psychological importance of rallying back above the round-number price of $1,200 (which supported market two or three times in 2017) and the breakout above the top of a two-month trading range could provide some fuel for short-term buyers.

LiveAction Scan: Unusual Call Volume, 10/15/18. Triple average call options volume.

Source: OptionsHouse

Gold bulls appeared to be even more aggressive in some gold-related stocks yesterday, including Franco Nevada (FNV), which appeared on a LiveAction scan for unusual options activity because it had traded more than three times its average number of call options yesterday morning (above).
Franco Nevada (FNV), 7/9/18–10/15/18. Franco Nevada (FNV) price chart. Gold stock breakout

Source: OptionsHouse

The daily chart above shows the stock broke out of its own consolidation last Thursday, and yesterday’s percentage gain was nearly three times that of gold.

Regardless of whether the market is gold or a gold stock, bullish traders will want to see prices remain above those breakout levels from last week, even if they are tested. Moves that probe too far into the former trading ranges could cause gold to lose some of its shine.

Today’s numbers (all times ET): Industrial Production (9:15 a.m.), Housing Market Index (10 a.m.), JOLTS (10 a.m.).

 

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