Gold declined to the lowest price in more than two weeks on Tuesday morning, possibly on speculation the Federal Reserve will curb stimulus as the U.S. economy strengthens.
Standard & Poor’s lifted its outlook for the U.S.’s AA+ credit rating yesterday to stable from negative, citing receding fiscal risks. Fed Chairman Ben Bernanke was quoted during testimony last month on Capitol Hill that the central bank could curtail its $85 billion of monthly bond purchases if the economy improves.
GOLD DATA
Gold’s 60-day historical volatility was at 28.8 percent yesterday, the highest since December 2011, according to data compiled by Bloomberg. Bank of Japan officials on Tuesday left a lending program unchanged, adding to signs that global policy makers may step back from stimulus measures. The metal tumbled 2.3 percent on June 7th, 2013 after the government reported U.S. payrolls increased more than forecasted in May.
Through early this week, prices slid 17 percent this year as some investors lost faith in the precious metal as a store of value and an improving U.S. economy increased speculation the Fed may scale back quantitative-easing measures that helped bullion cap a 12-year bull run through 2012.
BULLISH AND BEARISH INFLUENCES
If perception becomes reality and the Fed scales back, I will look for Gold to possibly retest the Mid-April lows. If the Fed continues its current policy of buying $85 billion a month, therefore leaving policy unchanged, I would look for Gold to possibly rally, at least to the $1425 area if not further, in my opinion. The Fed’s next meeting is scheduled for Tuesday June 18th and Wednesday June 19th, with a statement about the possible future of QE3 included in it.
THE TRADE
Therefore, I am proposing the following trade. I will look at simultaneously buying the July Gold 1310 put and buying the July Gold 1440 call for a purchase price of seven points, or in cash value $700.00 plus all commissions and fees. This option strategy is referred to as a strangle.
It consists of trying to provide protection on both sides of the market – if an extreme move is made one way or the other. I realize that the strikes are far from where the underlying futures contract is currently trading; however, given the aforementioned volatility, along with the violent price swings and wide daily ranges that have been commonplace in the precious metals this year, a move over $50.00 one way or the other is not uncommon in my view. Option expiration for July Gold is on June 25th, so a move on or just after the Fed announcement is paramount for this trade.
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. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS.
