Gold may drop to $1,200 an ounce, possibly breaching that level to test last December’s low at the 1183 area, thanks to a resurgent U.S. dollar and higher Treasury yields on expectations that the U.S. Federal Reserve could signal tighter policy this week.
Big Picture
Spot gold staged a modest comeback in Asia on Tuesday Sept 16, rising back above $1,236 after hitting an eight-month low of $1,225.30 earlier this week. The precious metal has suffered as the dollar has climbed, geopolitical risks abated, and physical demand from key consumers in Asia slowed.
A stronger U.S. currency makes dollar-denominated assets like gold more expensive for buyers paying in currencies like the euro or the Japanese yen. The dollar is hovering near a 14-month high against a basket of currencies after posting its ninth straight weekly gain last Friday. Any indication of the Fed normalizing its monetary policy faster would in my view spur more broad-based U.S. dollar strength and provide room for gold prices to drop toward a twelve month low at 1183.
However should the Fed disappoint the dollar bulls and keep the reference in the statement that rates will stay near zero for a ‘considerable time’, then the U.S. currency may partially unwind recent gains, offering a boost for gold. Gold bulls argue that the Fed will not alter the wording of its closely-watched statement this week to indicate a rate hike may be on the horizon earlier than thought because the U.S. jobs market and the underlying economy remain fragile.
Gold bulls also argue that financial markets may also be under-estimating the risk of an escalation of the conflict in Iraq and the broader Middle East, a scenario which would drive safe-haven flows into gold. These concerns were heightened following President Obama’s address to the nation last week in announcing the escalation in confronting ISIS and other terror threats in the Middle East and North Africa with U.S. airpower and troops on the ground in Iraq and Syria.
Trade Idea
In regards to what the Fed may or may not say I propose the following trade into the FOMC policy announcement. I suggest using an option strangle in October Gold options in buying one October Gold 1200 put and buying one October Gold 1270 call for 5 points or in cash value $500.00. The risk on the trade is the price paid for options plus all commissions and fees. I wouldn’t rule out a move in the underlying futures price near either strike price on the days following the FOMC statement.
Webinar
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.
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.
