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.
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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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.
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.
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.
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. .
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.
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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.