Take gold as another example of a market where the outlook has been and continues to be overwhelmingly supportive. After hitting a $2075/oz record high in early August, gold has spent the past three months drifting lower. This lack of performance has, however, not deterred investors as they continued to increase exposure, primarily via exchange-traded funds backed by bullion.
In our latest gold market update we warned that gold was not ready for an election shock or other adverse developments. This was a conclusion we made after taking a closer look at activity in the options market ahead of the U.S. election, which in terms of risk events, doesn’t come much bigger. An overview of the most actively traded options in GLD:arcx and GDX:arcx, the biggest gold and gold miners ETF’s found, perhaps not surprisingly but also somewhat concerningly, an overwhelming focus on the upside via calls. With such an overwhelmingly bullish view on the market, the risk of an adverse reaction rose to the point where renewed stock market weakness and a stronger dollar helped send not only metals, but most commodities lower.
However, looking at the gold chart we have yet to see a trend that raises concerns about a deeper and more prolonged sell-off. Despite the latest bout of weakness, the metal has not yet tested the September low at $1849/oz, let alone $1837/oz, the 38.2% retracement of the March to August rally. We view the current correction as temporary with rates at rock bottom low levels and continued fiscal and monetary intervention providing the support needed for gold. With that, we also expect to see silver trade higher once the election jitters have died down.