Tuesday, January 4, 2011

Trading Community Beginning to Turn Against Gold?

Increasingly my belief is large money has the capacity to move markets, and the ability to influence others via options market activity is increasing.  So many people are looking for any edge, and as we saw in 2008 with the banks - once players began blasting these institutions with put buying everyone began asking "what do they know that we don't know" and that led to selling... or more put buying... and it tends to feed on itself.   We saw similar activity in the CDS market for sovereign debt more recently.  The same goes for the upside, especially with so many services now alerting market players to large institutional scale activity in the options market.  One could say in some ways this is using the market psychology to manipulate things if you are a big enough fish.

i.e. short XX in scale, then start blasting the option markets with out of the money put purchases, which scream out to everyone in a market where any dislocation is picked up by algorithms the world over, which then leads to people asking "what does this big boy know?", which leads to copycat behavior or "shoot now, ask questions later".... which leads to ....

You get the point.  A very large player can move markets simply due to their scale causing others to mimic or question their own position.  That original shorting of XX in scale is a winner due to all the following factors.   Not to mention the follow up puts.

Apparently the "trading floors" are buzzing with large scale put purchases of the gold ETF at the 115 strike price (apparently in March).  This same player could have been shorting GLD (the ETF itself) in size ahead of this now very obvious put buying.  So does this feed on itself?  Already the questions begin "what does this person know?"  And so the human psychology plays on itself as the CNBC Fast Money crew jumps on it - so both the retail investor and the institutional investor now know "someone smart" is doing something.  If the herd follows the Pied Piper, the original put buyer (who potentially also has a big short position of the ETF itself) will make mad money frankly only due to the scale of his put position causing herding behavior. 

As we can see from the chart GLD 115 would be a dramatic drop, down below the 200 day moving average.  But frankly it need not go anywhere near that for said purchaser of puts to make mad money.  Indeed with today's 3% drop today this institutional buyer has already made some excellent change.  Even a drop to the upper 120s from the 134s would derive very big profits.  And all it took was said "smart money" leaving his/her large 'footprint' all over the market.

p.s. for your technicians out there, one could make the case gold has just made a head and shoulders formation.  

Here is a video of the Fast Money crew talking it up....

No position

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