The gold market has posted impressive price action in the past few weeks in the face of a rising U.S. dollar and in this week’s case a major rebound in U.S. stock indices.

See Figure 1 below. The gold market made a double bottom a few weeks back at the $1182-83 area from last December. Gold’s rebound, in my view, is largely due to safe-haven buying due to the lack in confidence in fiat currencies as central banks in Europe. Also, China has adopted more easing measures.

Big Players

Hedge funds and money managers increased their bullish futures and option bets in gold in the week up to October 14 after eight consecutive weekly declines, the Commodity Futures Trading Commission said on Friday. The world’s largest bullion-backed exchange traded fund, SPDR Gold Trust, has also seen an uptick in investments. Its holdings rose 1.5 tons last week, its first weekly inflow since early September.

Holiday Demand

Demand from India in physical gold buying has been strong of late due to the Diwali holiday, where the nation’s jewelers ramp up physical buying. But, this demand looks to ease going forward as Diwali is set to end. Chinese physical demand has been steady but tepid, with outright demand on the modest side with the recent dip below $1200. Now that gold has rallied over $70.00 from its recent lows, Shanghai Gold Exchange premiums have backed off as a result.

Fed Meeting

Looking at the calendar it should be noted that the FOMC will hold a two-day meeting next week. I don’t see gold rallying to new highs before the Federal Reserve gives their update on the economy, monetary policy, and the potential winding down of the last $15 billion of monetary stimulus or taper.

Technical Outlook

In looking at the charts, I see a 38.2% Fibonacci level from the recent low at $1262.4 basis December gold futures and a 50% retracement at $1287.

LuskOct22.JPG

I therefore propose the following trade. Using mini contracts in gold futures which are one-third the size of the full contract, I would propose selling mini- gold futures at the $1262 level with a good to cancel stop loss above $1187, which is the fifty percent retracement level. The risk on the trade is approximately $900 plus all commissions and fees.

The goal here is to sell this rally in gold at a technical point that is viewed as significant by technicians and looking to possibly catch some downside evening up before the FOMC release next week. A word of caution here as I would not carry the gold trade into next week’s meeting if filled at 1262, and if not filled, one should simply cancel the order before the FOMC policy announcement and statement next week.

Webinar

For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 pm central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012.  If you cannot attend live, a recording will be sent to your email upon signup.

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.