Fed Still Steering QE Boat, Buy Gold Calls $GC_F

by

Chairman Ben Bernanke strongly reiterated the value of quantitative easing in his semi-annual testimony before Congress two weeks ago. In my view, he made it clear that QE, the Fed's low interest rate policy, could continue well into the future. What makes this potentially significant is that there has been some recent dissension within the Fed, with some Fed Governors abdicating the end of the current stimulus.

MARKET CONUNDRUM
So, if QE remains the Fed policy, why has the U.S. dollar been so strong as of late and why has gold dropped almost six percent for the year? In my opinion, there is an interesting scenario going on with the world's central banks.

CURRENCY DEVALUATION
For those keeping score at home, one central bank after the other has followed suit and injected more liquidity into their economic engines by cranking up the printing presses at their respective treasuries. I feel that previous global economic crises or slowdowns have been confined to certain areas of the world; however, in the latest recession, the faltering of economies was so widespread that central bank easing caused a race for nations to devalue their own currencies. Surprisingly, this has kept the U.S. dollar relatively strong compared to the basket of major currencies in the dollar index.

The inverse relationships that result from a strong U.S. dollar can sometimes result in cheaper commodities, especially gold and crude oil. Gold has also potentially been pressured by rising stock prices, with the NASDAQ and Dow posting highs and the S&P 500 nearing its all-time high made back in 2007. Major banks have lowered their upside projections for the precious metal, while noted ETF holders, like George Soros, have reduced their exposure to the upside for gold by more than half.

GOLD AT MAJOR SUPPORT
The trend for both gold and crude has been down. I believe that $1,530 to $1,522 in gold is an important support level to watch, and the $1,545 to $1,555 level should also not be ignored. On the upside, $1,600 and then $1,620 are my first resistance levels. We finally saw a potential breakout Tuesday that took gold above its recent range of $1560-$1585, to settle at $1591.70.

Breakouts from near term wedge formations can sometimes unleash a more violentdirectional move.

LOOKING AHEAD
With next week's two day FOMC meeting on tap, I believe that nothing will change in the Fed's statement to what Bernanke stated in Congressional testimony two weeks prior.

TRADE IDEA
For a conservative option trade, look at buying the June gold 1650 call and selling the June gold 1680 call for a purchase price of five points. The price paid for the option spread, referred to as premium, costs $500.00, plus all commissions and fees. This is the risk on the trade. The maximum you could potentially collect on the trade is $3,000.00, if both strikes finish in the money at the time of option expiration, minus the price paid for the spread and any commissions and fees.

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 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. 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.

= = =

Read more trading ideas here.

0 Comments

Join In on this conversation, post a comment below.
No comments yet... Be the first to comment.

About the Author

Sean Lusk is a registered commodity broker and Director of the Commercial Hedging Division of Walsh Trading in Chicago.  Reach Lusk via e-mail here.

 He started in the business as a runner on the trading floor during summer breaks from college in 1993. Upon his graduation from Southern Illinois University at Carbondale in 1996, Lusk began his career on the trading floor of the Chicago Mercantile Exchange (CME). Overseeing billions of dollars of transactions working as a clerk in the Eurodollar pit, Sean took the next step and became a floor broker and member of the CME in 2003. He handled customer orders for banks and investment houses from all over the world from inside the Libor pit at the CME.

 Now, at Walsh Trading, he utilizes his experience in the marketplace and his professional client service skills to aid and assist customers in their trading endeavors.  Contact Lusk to be added to his free daily and weekly market commentaries focusing on both the Precious Metals and Agricultural Markets along with related market activity. He is widely quoted in the media including Futures Magazine, Reuters, Forbes, Kitco, Nikkei Press, and CCTV.com

Membership is Free. Join Now in less than 5 seconds! Alternatively Join or Sign In here.