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Saturday, May 11, 2013

Upside Volatility In Gold Cometh; With $100-$1,000 Daily Moves Being "Statistically Normal"

May 10, 2013 | By Tekoa Da Silva

1“There can be many firefights in a battle…It’s normally a brief engagement between units meeting in passing, or as part of an operation to clear enemy combatants out of an area.” 

The word firefight came to your editor’s mind when reflecting on the collapse witnessed in gold during the month of April. On Friday, April 12th we saw a tremendous 5.16% drop, only to be followed by a total smash of 8.99% at the open on Monday the 15th.

In total, these two trading days represented an over 14% ($200+) collapse in the price of gold—the most volatile and frightening period for many since the recent bull market in gold began.

Indeed, Monday the 15th represented the single biggest day of nominal trading losses in gold’s history. (See chart below)

(click to enlarge)

An easy conclusion for gold opponents to argue here, is that gold is riskier than ever before, and those who owned it before the crash have been sorely punished for their indiscretions.

But what you are likely already aware of, is that the fundamentals have screamed back at the sell-off, with Comex inventory depletion reaching historical levels, and hundreds of tons of gold being vacuumed up by the world’s largest retail buyers.

Therefore, this collapse appears to have functioned as a “market clearing event,” as described during the opening quote, “an operation to clear [out] enemy combatants,” or as gold trader Gary Savage recently suggested, a means to “unlock physical metal…[bringing it] back into the market,” to meet potential, “repatriation obligations”. 

With that said, when looking at history to determine what might follow this market firefight, data shows we are still in the “nascency” of this bull market in terms of the upside volatility to come. 

To be blunt: We ain’t seen nothing yet

As shown in the chart below, gold’s historical daily percentage changes (the real indicator of volatility), illustrate that gold’s volatility exploded to incredible heights between the years of 1970-1981. Percentage moves recorded during this eleven year period include:

46 days in which gold traded up 5% or more…
10 days in which gold traded up 7% or more…
6 days in which gold traded up 8% or more…
3 days in which gold traded up 10% or more.

(click to enlarge)
Considering these historical daily moves in the context of expanding currency supplies, two things can be easily argued:

1. During the totality of this bull market we shall see dozens of trading days in which gold moves up in excess of 6%-7%, with the final year of the bull market being punctuated by multiple 9%-10%+ daily moves.

2. These high percentage daily moves, will range in dollar terms, anywhere from $100-$1,000+ on each of those trading days. 

A $1,000 move in the daily price of gold sounds like a complete absurdity, however, it’s simple and easy to conceive of in the context of a growing money supply. If we ever reach $10,000+ oz. gold, then you can bet on seeing many $100-$1,000 days. They will become statistical normalities.
Bottom Line: This sell-off in gold may be remembered as just another skirmish meant to clear out “enemy combatants” (weak hands), before a final assault higher.

Both short and long term history are now pointing at amazing upside volatility, the likes of which we haven’t seen in decades. When that volatility returns (likely in very short order), these emotional days will be quickly forgotten.

Bull Market Thinking