What’s Got Gold Down?

Gold mining stocks and gold mutual funds increase in popularity as global tensions rise, but Wade Hansen takes a look at why prices are pulling back

   

We’ve seen these interesting movements happening in the after-hours futures market where we’ll see these big sell orders go through – it’s happened twice now – that cause gold prices to gap down. This has taken down gold and gold mining related stocks. Freeport McMoRan (NYSE:FCX) is down 19% on the week, Gold Fields (NYSE:GFI) is down nearly 6% for the week, Newmont Mining (NYSE:NEM) down 5.75% on the week and Goldcorp (NYSE:GG) was down 3.5%.

Get the full video transcript below

At the same time, we saw the opening prices come in SPDR Gold Shares (NYSEArca:GLD), the exchange-traded gold fund [gold ETF] that we were trading calls on that tracks gold prices, continue to drop.

We’ve seen a lot of different explanations out there for why gold prices have been dropping. We have seen that some money managers may be trying to free up some capital for other liquidity needs. We’ve seen prime dealers that have been engaged in repos and reverse repos, and the 10-year Treasuries trying to free up some additional liquidity to maintain those 10-year Treasury trades because they’re making a nice profit on capturing the bid/ask spread as they borrow 10-year Treasuries from one party and then loan them out to another party. They’re able to make some nice profits there.

We’ve also seen a little less uncertainty in the eurozone with some Greek deals being reached. We’ve also seen not as much panic about the fiscal cliff as we might have otherwise anticipated. So, gold prices have continued to drop down.

We anticipate that we’ll find some support in the $163 range for GLD, but we didn’t want to hold our calls all the way down to those levels. Plus, we had a December expiration on this one, so as we look at time value, we know that as we go along, time value melts slowly. Then, the closer you get to expiration, that time value waterfall tends to accelerate and you start to lose more and more on your options.

So, we were able to get out up here in the $167 area before this latest gap down in gold prices. We’re glad we did. It probably would have knocked any remaining value out of these GLD December 169 Calls.


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