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 Sujet du message: Gold investors disheartened as volatility spikes
MessagePublié: 03 Nov 2008 05:49 
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Sur Reuters://www.reuters.com/article/reute ... dChannel=0

By Frank Tang - Analysis

NEW YORK (Reuters) - Investors who would normally seek a safe haven in gold in what is one of the worst financial crises in history are shunning the precious metal because of the market's extreme volatility.

But bullion prices have dropped so sharply that buying is active in the Asian physical market, and that could bode well for gold prices in the weeks ahead.

"There is absolutely no question that when you see these kind of ranges and volatility for gold, you are going to step aside because you can get very hurt," said Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

Veteran gold traders said they have never seen such extremely wide daily ranges, which kept both institutional players and shorter-term investors at bay. Several sessions in the last two months saw daily price fluctuations of close to or more than $100.

COMEX December gold futures have dropped 20 percent after peaking at $936.30 on October 10 due to a sudden dollar rally and cash liquidity fears as stocks tumbled.

"It's forced liquidation and this money flow has been hitting every commodity," said Bill O'Neill, managing partner of New Jersey-based LOGIC Advisors.

"You look at these markets, whether it is agricultural or industrial commodities -- we are not trading on fundamentals, we are trading on money flow," O'Neill said.

Implied volatility -- the so-called fear gauge and a measure of the expected gold futures movement given an option price -- has jumped fourfold to its highest level in at least six years above 50 percent in October, compared with 39 percent at the end of the third quarter. Historically, it averaged 12.5 percent.

"Although gold price volatility continued to go up, you need to put this into the context of what's going on elsewhere," said Natalie Dempster, head of investment for North America at the World Gold Council, a trade group funded by the gold mining industry.

In October, the implied volatility of crude oil was above 70 percent. U.S. stocks volatility, measured by the CBOE Volatility Index .VIX, closed at a record high above 80 percent on Monday, compared with its long-term average of about 19 percent.

ILLIQUID GOLD FUTURES

"There are markets that are very skittish and volatile today. Interestingly enough, the liquidity in the gold market has contracted quite a bit as players have pulled back from certain markets focusing on other issues, mostly balancing out their risk," said Robert Lutts, chief investment officer of the Massachusetts-based Cabot Money Management.

Indeed, open interest, a measure of market liquidity, has recently dropped to just over 300,000 lots from a record of 490,000 contracts last October, thanks to the relentless unwinding of long positions by investors and speculators alike in market where confidence is shaken.

"Once we get into a little more stable environment, we think the players will come back and that will provide more liquidity," said Lutts, whose company manages assets of $400 million.

Lutts said that $2,000 gold was a reasonable target in the next several years, and he has long recommended clients to allocate 5 to 10 percent of their portfolios in gold investments.

A rocky bullion market also worried some gold mining executives.

"The volatility, at least in the gold price itself, is unprecedented. I think that makes investors nervous," said Rene Marion, chief executive of Gammon Gold, a Canadian gold producer which operates mines in Mexico.

RESILIENT PHYSICAL BUYING

Strong demand in the physical market remains a bright spot for gold, even though price volatility is normally a turn off for gold jewelers as they fret over losses.

Gold jewelry demand is poised to pick up after the Hindu festival of Diwali this week and the beginning of India's wedding season, both considered major gold buying events.

WGC's Dempster said preliminary indications from India suggest gold jewelry buying was strong in the third quarter and the first few weeks of October.

"Generally, price volatility adversely impacts the jewelry market, but the fact the price has fallen in tandem means you may not see that this time around," Dempster said.


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