Societe General said in a note this week that recent financial market turmoil and slowdown in emerging markets are unlikely to cause a recession in the U.S. The bank also noted that the market will gradually start pricing in another rate hike this year and multiple rate hikes in 2017 as the U.S. employment rate falls. SocGen Analysts commented that Gold is overvalued by six percent currently and that fair value for the yellow metal sits at 1150.0 an ounce. Deutsch bank on the other hand expects prices to remain well above the 1200 per ounce level with an average price in the fourth quarter of 2016 around 1230.0 an ounce. Deutsch bank cited recent actions of the world’s central banks including the European Central Bank, the Bank of Japan, and Sweden’s Central Bank cutting interest rates into negative territory that erodes holding cash as opposed to Gold. Such divergent views among two of the world’s largest global banks should create increased volatility as their opinions on Fed policy concerning rates are guiding their market commentary. Speaking of the Fed, their next meeting is March 15th and 16th, and their policy announcements could set the tone for Gold and obviously the Dollar and Stock prices as we enter the second quarter.
What is not under debate has been increased demand in the Precious Metals sector so far in 2016. Non Commercial and Non reportable funds increased their long positions in Gold to 196,913 contracts as of last week. For Silver, non reportable and non commercials funds were long a total of 71, 962 contracts. In February of 2016, ETF’s saw their highest monthly rise in seven years. Also worthy of note was that the period between April 2015 and January 2016 saw India increase their gold imports by 25 percent over a year ago levels. Clearly long positions in the market are vulnerable to profit taking or reversals. In my view, Fed policy commentary and or action will be the driver for investors. I therefore would remain agnostic taking positions on both sides of the market.
I therefore propose the following trade for those looking for upside and downside exposure. For upside exposure look at buying one June Gold 1300 call while selling 2 June Gold 1380 calls. For downside exposure I would look at buying the June Gold 1150 put while selling 2 June Gold 1100 puts. These 1×2 ratio spreads can be packaged for a purchase price for 4 points. In cash value the trade would cost $400.00 plus all commissions and fees. The risks here are the cost of the trade plus all commissions and fees along with being short an extra call and put. Should the trade remain intact and either the call or put side options get exercised, one would be either short a futures contract at 1380.0 basis June futures or long 1 June futures contract at 1100.0.
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
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.
