The next three trading sessions might reveal gold’s fortune for the next few months.
Our friends at the Federal Reserve wrap up a two-day meeting on Wednesday July 31 that may reveal the future of quantitative easing that is if the Fed decides to offer clues to taper back their unprecedented bond buying program.
Gone are the days from Fed meeting’s past when the question for investors used to be— will the Fed be raising or lowering interest rates? There is absolutely no chance of that as Bernanke told lawmakers on Capitol Hill a few weeks ago. If the Fed keeps to the status quo, low rates for an extended period with stimulus of $85 billion a month in place for the foreseeable future, gold could get a bounce.
JOBS DATA IS KEY FOCUS
However, if investors perceive that the Fed’s intentions are to begin to taper sooner rather than later, we could see some movement to the downside. In either case the Fed obviously will be “data dependent,” with jobs as the most important watched bellwether for the economy to be watched. Private forecasters are calling for a potential gain of 175,000 jobs added for Friday’s unemployment report with the unemployment rate falling to 7.5 percent.
Any major deviation from the estimate along with prior month revisions could have major ramifications for the yellow metal going forward. Let’s suppose the Fed stays status quo, reiterating prior commitments to QE3, and the unemployment number and prior month revisions disappoint off this scenario, Gold could rally up to new one month highs, possibly to 1400.
Another scenario could reveal investor sentiment acknowledging that the Fed could taper sooner than later while Friday’s jobs report surprises with let’s say a gain of over 200,000 jobs. In this scenario, I could see a pullback in gold back to the low 1200’s. We could see many scenarios in the next few days, but one thing we won’t lack is volatility. Therefore I propose to be protected on both sides of the market and am proposing the following trade.
IRON CONDOR SPREAD
The strategy I am proposing in order to be covered on both sides of the market is called an Iron Condor. It entails buying both a call spread and a put spread at the same time. The option strikes I am proposing include buying the September Gold 1400 call and selling the September Gold 1440 call, while simultaneously buying the September Gold 1230 put and sell the September Gold 1190 put, for a purchase price of 6 points or $600.00.
The risk on the trade is the price paid for the spread plus four commissions and fees. What I am looking for is an extreme move up or down in the Gold market given the importance of the economic data and Fed announcements in the next three days. If either the put spread or call spread options finish in the money at expiration, the maximum one could collect is $4,000.00, minus commissions and fees.
Please feel free to call me at anytime to discuss other strategies and to receive my free daily commodity and precious metal reports.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
