ROSS NORMAN : Gold Gravitates To $1250 Ahead Of Futures & Options Expiry
Like a celestial body, gold has a number of influences affecting its trajectory.
Aside from the primary direction of travel formed by flows into and out of this asset, there are also short term distortions - a type of gravity at play - which affects the market on a temporary basis - this is the parrallel world of futures and options trading. If past form is a good indicator, then we would expect the market to gravitate to where the biggest volumes are, before continuing its journey next week.
As gold futures and options near expiry there is intense buying and selling around the key levels, creating a sort of magnetic effect, or gravitational pull towards the strikes where the biggest volumes are in play. Visualise a small comet passing a large planet and you get the idea. Currently the volumes are centred at $1250.
The importance of this aberation is what happens just after it passes
Once the gold market is liberated - often, if there is pent up demand, we see the market accelerate very rapidly northwards ; or perhaps it has simply been pulled up by its bootstraps before slipping quietly south and we realise it was artificially elevated.
The leading indicator just might come from an important aspect of the market that rarely achieves headline status - and that is physical demand. Anecdotally our group (said to be one of the largest traders of retail physical coins and bars in Europe) is now seeing quite alot of tightness in gold demand despite firm prices.
To be clear, firm gold prices typically lead to a softening in physical demand because our market is normally quite price elastic (or price sensitive) ... the exception to this is when we see strong exogenous factors and we see buying on price strength (that is to say it becomes price inelastic). Such a driver might be heightened geopolitical tensions.
It is too early to be categoric about this, but our current reading of events is that gold does look as if it might be nearing an inflection point and flipping into 'inelastic' mode. Time will tell.
Perhaps the wilder notions that gold is going to the stars is not entirely wrong thinking after all.
Sharps Pixley, London
23 Mar 2017 | Categories: Gold