Wednesday’s Gold rally prior to the FOMC policy announcement release occurred on two fronts with the first being short covering ahead of the Fed’s policy statement. The short covering was predicated on news that number one world gold buyer India has lowered its gold import tariff because of softness in the world economy. This is good news for gold bulls as demand from India in years past has been insatiable. However recent duties on gold imports the last few years have hampered gold purchases in India leaving black market purchases as a secondary source of import to illegally avoid paying the government duty.
The recent rise in gold price up to 1169.8 in late August was in my view due to economic problems in China. There was an outflow of Chinese money out of US Treasuries that rekindled safe haven buying in gold along with the sizable selloff in U.S. equities that also promoted gold’s appeal. The rally was short lived on two fronts with one being profit taking ahead of the Fed announcement and secondly the recovery of global bourses most notably in the U.S. and China. Despite the Fed announcement tomorrow that will no doubt rattle commodity markets, it is largely seen as a one and done scenario should the Fed hike rates a quarter point. Recent speeches by Fed officials have been seen as hawkish for short term rates but the actual FOMC meetings themselves have been seen as dovish. Because of the inconsistency in message, I believe the proper course of action going forward is to have some exposure on both sides of the gold market into the FOMC.
I therefore propose the following options strangle in to the FOMC meeting. The strategy calls for buying the October 1160 call and at the same time buying the October 1080 put for 4 points, or in cash value $400.00. The risk on the trade is the cost of the trade plus all commissions and fees. This is purely a volatility play as October options expire on September 24th, leaving a week for a sizable move following the FOMC.
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. Or please contact me at any time at slusk@walshtrading.com
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.
