Gold futures inched slightly higher on Tuesday, possibly buoyed by the yellow metal’s safe haven appeal. Weak economic data in the U.S., coupled with the Bank of Japan’s decision to loosen its monetary policy, were potential reasons gold settled above $1690 yesterday.
Sales of existing homes fell 1% in December, missing expectations, while The Richmond Fed Manufacturing Index came in at negative 12 for December, missing projections for a reading of 5. In my opinion, the disappointing economic releases, along with a lower U.S. dollar, may have drawn investors into safer haven assets yesterday.
Gold investors, in my opinion, seemed to shrug off news from India, where the government on Monday raised duties on gold imports to six percent from four percent in order to possibly reduce the country’s high current account deficit. India is the world’s number one gold consumer accounting for 12 percent of the world’s gold demand. However, India’s increase in duties wasn’t a surprise to investors and, in my view, may have been expected for some time.
THE CHART
Technically I am watching the $1698.5 level which represents a 38% Fibonacci retracement number basis February gold. A close over this level could possibly represent a move higher. My weekly swing numbers come in as follows. Support is down first at $1665, and with a close under, $1643.1 the next level down. First resistance is up at $1703.3 and with a close over, $1719.7 the next level to the upside. Gold begins its third straight week of upward momentum, but investors will possibly be watching earnings releases along with PMI reports out of Europe and China later in the week. This data could potentially precipitate some corrections in the stock market and U.S. dollar.
THE TRADE
If gold cannot rally above the $1700 level in the next few sessions, I would propose the following trade to possibly a catch a move to the downside. Traders can look to buy the March gold 1630 put for a premium of four points or a $400.00 risk. The risk here is the price for paid for the put option plus commissions and fees. In my opinion, I am not looking for the futures to move down to the $1630 level, but maybe a reasonable correction back down to the $1665-1670 area. I would look to exit the put option if the premium reached 10 points or greater. Each full point referred to as premium is worth $100.00 on options on gold futures. It is my opinion that if gold can’t break to the upside and post new 2013 highs soon, recent longs might take profits which could potentially result in a pullback in price.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 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.
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