On Demand

Gold: Time To Hedge Your Bets With A Put $GLD $GC_F

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Add Australia to the growing list of central banks that will continue or enhance their printing presses to provide more liquidity to aid and assist their depressed economies.

RBA NEWS

In somewhat of a surprise, the Reserve Bank of Australia (RBA)on Tuesday cut interest rates by 25 basis points to 2.75%. I believe the immediate effect was that global indices shot up higher on Tuesday, while there was no positive influence on gold prices.

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WATCH LUSK DISCUSS GOLD IN THIS VIDEO ON CHINA CABLE TV.

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THE GLOBAL PARTY

The RBA's rate cut comes on the heels of an interest rate cut last week by the European Central Bank and the Federal Reserve's decision to continue with its $85 billion monthly bond-buying. Last month the Bank of Japan announced a larger-than-expected stimulus program to prop up the sagging Japanese economy by doubling the monetary base to 270 trillion yen ($2.9 trillion dollars) by the end of 2014. Lastly, news reports say that the Bank of England will continue to keep its interest rate at 0.5% and its asset-purchase program at 375 billion pounds when it meets this Thursday.

GOLD IMPACT

In my view, the effect of QE1 and QE2 were sizable for gold and may have been a big reason why gold rallied to an all-time high of $1923.0 an ounce in 2011. However, at least for this year, central bank easing has not been met with the same buying frenzy that we saw the past few years.

STOCK BOOM

There are many potential reasons for the pullback. However, in my view, the main one is the performance of the stock market. I believe the stock indices have been the investment of choice, with the Dow, S&P, and NASDAQ continuing to post new all-time highs.

Meanwhile, gold is down 14 percent for the year. Safe haven buying for the yellow metal has waned. Recent surges in physical buying may have buoyed gold and ignited a bounce from mid-April lows, as dips below 1400.0 may have seemed like great bargain buying opportunities for retailers and central banks.

KEY LEVELS

However, as the market claws back to near 1500, I believe physical buying may ebb for a while. Historically, central bank easing on a global scale has been a bullish fundamental for gold, but for 2013 it hasn't provided any measurable rally. It is my belief that when markets don't react bullishly to bullish news, they often trade in the opposite direction. In my opinion that is what we have seen so far this year and that a pullback retesting mid-April's lows could be seen in the next month or so. .

THE TRADE

I am proposing the following conservative trade. I will look at buying the July Gold 1350 put and selling the July Gold 1320 put for a purchase price of 3.5 points, or in cash $350.00. The risk on the trade is the price paid for the spread plus all commissions and fees. The maximum you could collect is $3,000.00 that is if both strikes finish in the money at the time of option expiration, minus the price paid to enter the spread and all commissions and fees. If Gold does not go below the 1400 level on or before the June jobs report, I will look to exit the spread.

Please feel free to contact me and sign up for my daily and weekly Gold Reports sent to your email for free.

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.

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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

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