Gold: An Inverse Trade With Equities

Precious metals rallied sharply late last week and through Monday’s session in the face of significant equity losses. While plunging equity markets offer a “risk off” mood that drove investors into the precious metals sector most notably into Gold and silver, that same reaction could reverse itself if Janet Yellen’s testimony in front of Congress is seen as dovish. However should Yellen’s commentary be seen as “staying the course” with the sentiment being that possibly two to three rate hikes could still be on the table in 2016, we could see more inflows into Gold and Silver with the result being higher prices. Needless to say, the two day testimony by the Fed Chairman will be extremely paramount, especially since the FOMC doesn’t meet again until the middle of March.

Technically speaking with another upward extension in Gold amid uncertainty in the equity sector, Gold and Silver have also benefitted from fresh interest as holdings of the SPDR Gold trust continue to rise. On Monday they rose to their highest level since last July of 2015.  Also worth noting is the rise of both volume and open interest on this rally in the face of higher prices. Upside targets come in as follows with the first target at 1208.2, as that level represents the 61.8 percent retracement from the 52 week low. If that level gets taken out I would look for the yearly R1 at 1228.8 the next resistance level basis April futures. Support comes in first at 1177.0 as that level represents a 50 % Fibonacci retracement level from the January 2015 high and December 2015 low. For the trend to stay intact  the 1133.6 and the 1137.0 level needs to hold as it represents the yearly pivot number and 200 day moving average.

At these levels I would remain agnostic especially in front of the Fed Chairman’s testimony. Therefore I propose the following trade. For upside exposure I would buy the April Gold 1225 call and sell 2 April Gold 1275 calls while at the same time buying the April Gold 1135 put and selling 2 April Gold 1100 puts. Purchase price should be no more than $2 dollars on the option package which in cash value would be $200.00 plus all commissions and fees. The risks here besides the cost of the trade and commissions and fees are the shorting of an extra put and call. Should those short options get exercised at option expiration, one would be either short or long a futures contract at 1100.0 or 1275 April Gold. Please contact me to discuss if you have questions.

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 anytime at slusk@walshtrading.com

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