Bullion traded higher on Tuesday, rebounding from overnight lows...

Bullion traded higher on Tuesday, rebounding from overnight lows on ongoing Greek default concerns and disconcerting U.S. economic indicators. To wit, 46.2 million Americans are living in poverty, the highest number since the Census Bureau started tracking the statistic. Treasury yields pressed lower against the backdrop of immense market volatility. This agitated state is likely to continue through the next Federal Open Market Committee meeting on September 20th. Even more pressing than whether President Ben Bernanke will dispel the rumors surrounding a possible QE3 is exactly how a prospective Greek default will be handled. The increasing clamor is shaking loose all sorts of rumors, desperation and rating-agency downgrades, ranging from reports of massive Chinese bond-buying to a run on French banks. Our guess is it?s going to be a long week.

After trading as low as 1794.80 in the overnight session, December gold rallied for the rest of the day. While it initially opened firm, volatility was well offered on the day, falling 2 percent on a tilt and to an even greater extent in October. Despite choppy trading, and seemingly large erratic moves, gold has spent the majority of the past two weeks trading tightly between the 1800-1900 strikes. As such, the expectations of a more orderly seem to be returning. October and December Calls were offered and wings were lowered in sympathy with volatility.

Options: While skew eased slightly toward the calls the most telling aspect in today?s option?s trading was lower volatility. This suggests a trend towards more orderly trading and perhaps even a sell-off, as volatility is not likely to perform in a sell-off. Intuitively this makes sense, as we hear far more predictions for 2200+ prices sometime next year than we do $400 corrections. Options suggest the sideways trading is likely to continue and an explosive move is becoming less likely. Conclusion: Sideways/Neutral

Technical: Yesterday we noted that while a settlement below the 20-day moving average was bearish, we would be reluctant to commit to the move until we saw a settlement below support at 1790. That sentiment served us well, with gold rebounding off 1795 in the overnight session and trading nearly all the way up to 1850 in the afternoon session. After today?s rejection gold has now formed a triple bottom at the 1800 strike, a strong reversal pattern and gold is a technical buy again. Whether one looks at the chart as a bull flag or a channel, gold seems likely to test resistance between 1860-1880 before trading lower. If gold trades above all-time highs at 1923.70 the rally is likely to resume in earnest and carry prices above $2,000 an ounce. Conclusion: Somewhat Bullish



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