Gold News

Gold Prices Rally from GLD Options Trigger, US Debt Default 4 Days Away

GOLD PRICES rose Monday morning in London, recovering more than $20 of last week's $50 drop to trade at $1287 per ounce as world stock markets fell ahead of this week's technical debt default by the US government.
 
The SDPR Gold Trust (ticker: GLD) meantime rose 1.2% to $124.05 after losing 3.1% last week.
 
"Although a default would clearly be bullish for gold prices," writes Jonathan Butler at Japanese conglomerate Mitsubishi, "the US is very unlikely to breach the debt ceiling.
 
"The coming days could see prices drift lower as the resolution of the crisis prompts a rally in risk assets and a move out of gold."
 
Senate Democratic leaders yesterday refused to agree a short-term deal to avert Thursday's debt-ceiling limit only by locking in budget cuts for 2014, the New York Times reports.
 
Debt default "would mean massive disruption the world over," said IMF managing-director Christine Lagarde. "We would be at risk of tipping yet again into a recession."
 
Dropping as low as $1264 per ounce on Friday, today's rising gold prices "[saw] some quite good physical demand," Bloomberg quotes Bernard Sin at Swiss refining group MKS, refering to wholesaler buying in Asia.
 
Amongst Western investors, however, the GLD fund shed another 9 tonnes of bullion during last week's drop in gold prices, taking the quantity needed to back the ETF's shares to a new 56-month low of 891 tonnes.
 
Options traders were  concentrated Friday in $124 and $122 puts in the GLD, according to Reuters data, going into last week's expiry.
 
Friday saw the GLD fall to touch that lower level before ending the week at $122.60 per share. Having been out of the money all week with GLD starting at $128, those put options – which gave the holders the right to sell GLD shares at those prices, and which would expire with Friday's close – gained value during Friday morning's sharp plunge.
 
"It is difficult to gauge the extent of speculative positioning [in gold futures] and whether the move that began early last week is driven by the short or long side," says ANZ Bank in a note, because the weekly CFTC regulator's Commitment of Traders report is missing thanks to the US government shutdown.
 
Gold prices nevertheless remain "technically broken below 50- and 100-day moving averages," says chart analysis from Morgan Stanley, now looking for a test of the summer's low at $1082 "if Washington is able to compromise."
 
Over in India and China today – the world's top two physical gold buyers – new data showed consumer-price inflation in both countries rising to 7-month highs in September.
 
Now at 3.1%, "The rise of [China's] CPI inflation leaves little room for policy easing [ie, interest rate cuts to spur the economy] as the benchmark deposit rate is only 3%," says Nomura's chief China economist in Hong Kong, Zhiwei Zhang.
 
Gold bullion refineries in India are meantime running at just 25% of capacity, according to industry figures. Because the government's strict anti-import measures, plus falling gold prices domestically, mean they cannot source feedstock to meet the current festive-season demand.
 
Last week's drop in GLD gold holdings coincided with a drop of 120 tonnes in the world's largest silver ETF, the iShares Silver Trust.
 
Shedding metal to back its shares at the fastest pace since May, the SLV only retreated however to a 3-week low at 10,505 tonnes.
 
Silver today outpaced the rally in gold prices, adding 1.5% by lunchtime in London from Friday's finish.

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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