HardAssetsInvestor

Written by Brad Zigler  |

September 14, 2010

Yesterday’s Hidden Gold Clue

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Real-time Monetary Inflation (last 12 months): -3.2%

With a rather ignominious start to the pro football season (sorry, I meant the American football season), ill-wishers are now asking me, "Hey, how ‘bout them ‘Niners?"

Of course, these blokes are needling me about the 31-6 drubbing handed to the San Francisco 49'ers by the Seattle Seahawks in the regular season opener on Sunday. (They think, because I live in the environs of The City, that I actually care about the pro franchise; in fact, I'm more interested in the gridiron doings of the University of California Golden Bears. Hey, I'm used to disappointment.)

So, this morning, it's my turn to ask, "Hey, how ‘bout that gold?" Only this time, the question isn't focused on a loser. Gold shot up this morning, even after signs of slackening momentum flashed yesterday.

Gold's intermediate upward trend line was broken over the past two trading sessions, and its momentum oscillator was at odds (translation: downward-pointing) with its relative strength indicator—signals of an impending weakness. Together with that, more than a half-tonne of bullion was offloaded from the vault holdings of the SPDR Gold Shares Trust (NYSE Arca: GLD).

There was, however, a technical outlier supplied by the option market yesterday. The cost of gold insurance actually went down in yesterday's last quarter. The day before—Friday—premiums for near-the-money SPDR gold puts cost half as much as puts based on the S&P 500 Composite. By day's end yesterday, gold's insurance cost shrank to 41 percent. In other words, gold's downside risk was perceived lower by the option pros.

And this morning, the yellow metal broke from the gates at a fast pace, as buying—probably from speculative quarters—piggybacked on U.S. dollar weakness to propel prices to new highs.

Gold wasn't alone, though. Silver came along for the ride. Actually, some would say silver was driving the team bus. If you think about it long enough, you'll see that gold was a loser after all. Compared to silver, that is.

The white metal was fixed at $20.31 in London this morning, 38 cents higher than yesterday's peg. With a morning gold fix at just over $1,253, that put the gold/silver ratio down to 61.7-to-1.

Remember the gold/silver ratio (see "How To Trade The Gold/Silver Spread")?

We started out with a futures-based multiple at 64.4x at the top of the month. At the New York open today, we were at 62.1x, basis the December contracts, yielding a 67 percent return on margin:

Gold/Silver Ratio Declines

Given the volatility of spec money in the precious metals market, this might be the time that some spread traders cover their risk by taking money off the table. They'll punt with their initial margin stakes, keeping only the money the market's bestowed in the game.

The ‘Niners didn't have the cushion to do that on Sunday. Perhaps they'll have better trades ahead of them.