Those who read last week’s proposed trade on gold regarding buying calls and selling puts using April 2017 options have been rewarded so far. Intra-day dips have been seen as buying opportunities as demand has reportedly increased. Physical purchases out of China have been bid up ahead of the lunar holiday there. The recent rally comes in the face of calls by Morgan Stanley and others citing a reduction in the Indian trade deficit because of falling gold imports. This comes on top of a report that China’s overall gold reserves at the end of December 2016 were left unchanged from the month prior. Declining or stagnant physical accumulation by the world’s top two physical buyers doesn’t bode well for Gold’s prospects longer term.
So why the rally to begin the year? A couple things come to mind, with the first being the tendency of the gold market to rally/short cover from a potential seasonal factor to begin the year. Second, the fact we are nearing the beginning of the Trump administration in Washington and the major uncertainties that brings for investors amid the unpredictability of the new commander in chief. Third we have seen a decent pullback in the Dollar which traditionally trades inverse of Gold which has also helped to support.
Outside of something else entering into the market for Gold, I look for February gold futures to test the 50 day moving averageat 1196.9 in the very near term. A close over this level sends the market potentially to 1208. Those looking for a trade idea may consider buying futures contracts at the 1183.0-1185.0 level basis February futures. Protective stop losses in my view should be entered below 1168.0.
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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.