Financial investors boosted gold futures to a six-month high last week. Those speculative bets are putting gold more at risk for a correction, some analysts say.
Data from the CFTC’s Commitment of Traders report, issued Friday, covering the week to March 11, showed the increase in the price of gold was largely driven by speculation. Net long positions — essentially bets for higher prices — were expanded for the fifth-consecutive week, bringing them to 106,000 contracts, according to Commerzbank.
Gold has been under pressure since this past Sunday night’s open. After hitting a 2014 high at 1392.6, April Gold futures fell just over $40.00 before recovering near $1360 an ounce at Tuesday’s close.
The Crimean vote came in as expected with no shots fired in the region. Also the Fed concludes a two-day testimony with an expected policy announcement that will state they cut $10 billion in stimulus as expected on Wednesday. Gold has rallied impressively this year posting just over a 15 percent gain for the year. For gold traders enamored by the current strength of the 2014 rally, let’s look at this year’s rally from a near term historical perspective.
Since the gold price peaked in September 2011 and began its recent downtrend, it has been common to witness short covering rallies or retracements. In my view, the common feature of these rallies is that they do not last for much longer than three months and that the degree of appreciation typically does not exceed 15%. As a result, I argue that the recovery in the gold price since late December last year could unravel as we enter the second quarter. Obviously geo politics will have a lot to do with this premise, but it has been my experience that the large increase in the amount of bullish speculation most likely means that the public has finally joined in which could spell doom as we head into month and quarter end.
I therefore propose the following position trade using May Gold options. In looking for a pullback in price I propose buying the May Gold 1325 put and selling the May Gold 1300 put for a purchase price of 5 points or in cash value $500.00. The risk on the trade is the price paid for the spread plus all commissions and fees.
The maximum one could collect is $2500.00, if both strikes finished in the money at the time of expiration minus commission and fees. This is a conservative way in my view to have some downside protection or exposure going forward.
For those interested Walsh Trading is holding our weekly grain webinar series this Thursday March 20th at 3pm central time hosted by our Senior Grain analyst Tim Hannagan. Tim has been ranked #1 by Reuters and Bloomberg in 2011 and 2012 for his most accurate end of year price predictions for soybeans and corn. Registration is free and 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.
