In the week ended Dec. 3, short bets on gold increased by 4,557 to 79,631 lots, and longs slipped slightly to 106,405. That means the net long position in gold fell 16 percent to 26,774 futures and options, which is the smallest net-long position since June 2007.
Hedge funds and money managers are now less bullish on gold than they’ve been since June 2007, data from the Commodity Futures Trading Commission show. As economic data has improved, many now expect the Fed to start to bring its quantitative easing program to an end. This is likely to cause interest rates to rise, making non-interest-bearing assets like gold less attractive.
YEAR END BOOK SQUARING
Now we are coming into the end of the year, and end of the fourth quarter along with heading into next week’s most anticipated FOMC meeting. Trend and Index following funds do what they always do when they have a big lead in the market and that is to book big profits before month and quarter end, So that the managers of these funds can pay themselves handsome bonuses.
UNDERSTAND HOW THE FUNDS WORK
It is imperative in my view that traders understand how these funds act and react if you trade commodities in my view. I think it is occurring a little earlier here due to the enormity of the FOMC meeting next week. Gold sentiment may have gotten so depressed, and gold positioning so bearish, that the upside now outweighs the downside. Hence the $60.00 rally from Friday’s to Tuesday’s high yesterday. In the chart, you will notice a Fibonacci retracement level at 1275.0, which is a 38% retracement from the June low to August’s high. It is at this level I propose the following trade.
LOOK DOWN
It is my opinion that we could see another move to the downside in gold and therefore am proposing a put spread using February options. I will look at buying the February Gold 1210 put and sell the Dec gold 1180 put for three points or in cash value $300.00. The risk on the trade is the price paid for the options plus all commissions and fees. Option expiration is not until late January so there is ample time in my view for a significant move lower.
GRAINS WEBINAR
For those interested in grains, Walsh Trading’s senior grain analyst Tim Hannagan will be holding his weekly webinar series this Thursday at 3pm Central. Tim is the #1 rated grain analyst per Reuters and Bloomberg for his most accurate price predictions for corn and soybeans in 2011 and 2012. If you cannot make it live, recordings will be sent to your email and signup for both live and recorded here.
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
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