Chinese firms may have locked up as much as 1,000 tonnes of gold in financing deals, a report from the World Gold Council said this past Monday evening. This indicates that a big slice of imports had been used to raise funds due to China’s tight credit conditions rather than to meet consumer demand.
The financing-related buying in the world’s top gold consumer means prices could come under pressure if imports are hit by a broader crackdown on using commodities for finance. The result in the gold market off this news was that many speculative traders were stopped out overnight as gold fell over $40.00 to give back much of its recent rally.
Personally for anybody that has been paying attention to the gold market would have noticed that China backed off buying at some point in February. Over the past couple of years they have been notorious for coming in light and buying the dips and not chasing the rally. In fact the Chinese Central Bank made a sizable purchase from Switzerland in February and has since backed off. This coincides with gold’s rally up and through 1300.0. The rally in March and then last week was mostly technical and aided at times due to the Russian/Ukraine standoff.
Currently we are trading just above $1300.00 basis June right at the key 200-day moving average.
It is my opinion that this week’s washout was exactly just a washout and that higher prices could be in the offing. Unfortunately it doesn’t appear that the crisis in Eastern Europe will abate any time soon and with both armies face to face, we could see armed conflict sooner than later.
Also with stock indices just two weeks away from their annual swoon, “Sell in May and Go Away,” we could see gold pick up some safe haven appeal due to pullbacks in the indices.
TRADE IDEA
Therefore I propose the following trade. Look at buying the June Gold 1350 call and selling the June Gold 1390 call for a purchase price of five points or in cash value $500.00. The risk on the trade is the price paid for the option spread plus all commissions and fees. The maximum one could collect is $4,000.00 that is if both strikes finish in the money at the time of expiration. This is a low risk trade to achieve some upside exposure or protection in my opinion.
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.
