Among the headwinds that countervail any ascent in Gold was the disappointing news a few weeks ago that China’s Gold reserves had only rose 57 percent in a span of 6 years. I wrote a day after the data was released from the Peoples Bank of China that this could be some type of deception by the Chinese government to alter the perception that they weren’t building their Gold reserves fast enough to support their fledgling currency.
While that still could be true it has been the withdrawal in Chinese equities that has softened any appeal for Gold especially in physical form. Physical demand has been tepid at best in India and China in recent weeks and that is mostly due to the 27 percent withdrawal in the Shanghai Composite along with the anticipated rise in U.S. interest rates. Gold has bounced nearly $20.00 from last Friday’s lows mostly due to short covering and profit taking ahead of this week’s FOMC announcement and August option expiration that occurred on July 28, 2015.
However the charts tell a different story with a strong trend from the upper left to the lower right still intact, where any rallies become selling opportunities. The latest Commitments of Traders Futures and Options report of last week showed non-commercial and non-reportable traders still held a net long of 17,625 contracts which was a decrease of 32,698 contracts in the net long position by these traders. With open interest recently declining and volume rising on the sell-off last week, a technical bottom may have been formed. However, unless the FOMC posts dovish commentary on rates this week or the health of the Chinese economy improves from key data releases this week, it will be hard for the bulls to regain control of the market.
My downside target for Gold sits at 1019 which is the yearly second support level for Gold for 2015. However August has been a seasonal boon for the Gold bugs as physical demand significantly increases as we head into Indian wedding season. I would therefore advise caution at these levels and suggest position trading the Gold market taking positions on both sides of the market.
I propose buying the October Gold 1050 put and selling 2 October Gold 1000 puts for a purchase price of 1.00 or in cash value $100.00. For upside exposure I would look at buying the October Gold 1130 call and selling 2 October 1170 calls for $3.80, or in cash value $380.00. There are two risks on this strategy with the first being the cost of the option spreads plus all commissions and fees. The second risk is that you are short an extra put or call in this strategy and if either the 1170 call or 1000 put gets exercised in the money at option expiration one would be left with a short or long futures position.
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. Link for next week’s webinar is below. 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.
