The Tower of Terror: Going Down?

Today was a wild ride. We hope most of you who were long as of this morning either own protection or had stop loss orders in place. Most asset classes tanked on the heels of a poor 10 Year Treasury Note auction at 13:00 EST. The Dollar strengthened as U.S. equities bled and Oil dipped below $85.60/barrel. On a positive note, The Ag trade remained resilient thanks to bullish data from the USDA report this morning. In particular, Raw Sugar was up almost 4% and closed at $0.3311. Yet, out of all this unexplainable excitement today's zippy price action in Gold piques our curiosity the most.

Gold traded up to new all-time highs of nearly $1425 per Troy ounce before its precipitous sell-off to $1385. Wow, a $40 range in one session! Surely, we will not take this abrupt volatility lightly. Or shall we?

December Nymex GC

Even though GC sold off materially after its morning erect, none of us should gasp in awe. Gold is everywhere. The likes of ESPN, NBC, and even NBA TV (yes) bombard us with daily commercials pedaling the 'once in a life-time opportunity' to own the not so rare/often ignored physical form of the precious metal. In addition, we watch in silence as the members of the far right such as Glen Beck hypnotize our fellow men into believing that bullion is the only asset capable of protecting us from the imminent economic collapse (Rubbish we say, moldy rubbish). Also, Gold frequently claims the front-page headlines of local, national, and international information (what really qualifies as news these days?) periodicals. In short, Gold is ubiquitous.

Regardless of Gold's correlation/pricing with/in the U.S. Dollar the precious metal has now become a speculative trading vehicle rather than an inflation/deflation/sovereign debt/economic collapse/financial armageddon hedge. Don't believe us? Let us briefly examine the SPDR Gold Shares (GLD) ETF. In the period between October 1 - November 8 on average 17.75 million shares of GLD changed hands daily. In the prior 27 trading days average volume came in at only 12.1 million shares daily. With the aid of an envelope, we calculate this increase in volume to be nearly 47%! Also, as of GLD's Q2 SEC filing approximately 96 million new shares were created. This brings the total shares outstanding to a whopping 434 million. Hence, more retail investors joined the game.

Where do prices go from here? Up, Up, and away. The Federal Reserve's quantitative easing program will most likely impede any progress the dollar makes, and thus openly encourage irresponsible commodity speculation. Also, do not let us discount emerging market demand stemming from a desire to diversify reserves away from U.S. Treasuries (yes we point to China). Finally, we will be wise and remember that a bubble only becomes a bubble once the masses are aware. This point is of critical importance to remember while prices sail to uncharted territory.

-Patrick M. Ambrus

Sources: bloomberg.com, finance.yahoo.com, spdrgoldshares.com, USDA.gov

Disclosure: No Positions