The gold price tumbled on Friday, conforming to type in the face of a surge in expectations of an increase in interest rates by the Federal Reserve. The latest non-farm payroll numbers last Friday showed that the US economy gained 271,000 jobs in October, well ahead of both the 182,000 jobs expected by analysts and the 200,000 benchmark for healthy labor market growth. In an unexpectedly strong the Department of Labor announced the unemployment rate in the US fell to five percent, while wages rose by 2.5 per cent on an annual basis, the best figure since 2009.
With Fed officials already talking up the possibility of a December rates rise, as well as focusing their attention on jobs and growth at home, the report is seen as a sign that an interest rate increase is a likely prospect. Investors initially predicted a 50/50 chance of rates being raised next month but they are now putting the chances at 70 percent. Rates rises boost income-generating assets but hit non-yielding commodities like gold. The precious metal also suffers when the dollar rises, as this increases the cost of buying for overseas investors. Gold was already under duress since the last FOMC meeting and has now dropped over $100.00 from the last policy announcement. The gold price fell from $1,107 an ounce on Friday morning prior to the unemployment release to $1,084 after the jobs announcement, before consolidating slightly and ending last week around $1,087. Last week, it dropped by five per cent overall, its worst performance in two months, and it is now only slightly above its lowest closing price in five years of $1,084 in August 2015.
The jury is still out on rates to increase in December but is being priced into the market somewhat. The market will most likely see a sizable reaction on the headline. For a trading strategy I would simply be agnostic going forward which means in my view to be positioned on both sides of the market. In my view I would position using options 6 months into 2016 to potentially capture bigger protracted moves in the market. I would propose buying the June 2016 1200 call and sell 2 June 1270 calls for 1 point or in cash value $100.00. On the put side, Look at buying the 1000 put and selling two 930 puts for 1 point or in cash value $100.00. There are dual risks on the trade with the first being the cost of the trade plus all commissions and fees. The second risk is on the trade is that the strategy calls for selling an extra put and call. Should those options get exercised one would be either long or short a futures contract if the options get exercised.
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. Contact me at anytime 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.
