For those keeping score at home, the interest rate cut by the Australian Central Bank earlier this week marked the sixth time in the last two months that a Central Bank added stimulus or cut rates to try to ignite economic growth for the remainder of 2012 and into 2013.
UNPRECEDENTED CENTRAL BANK MOVES
Perceived global weakness, especially out of China, was one of the cited reasons for the rate cut that surprised some investors by the timing of the move. Nevertheless, Australia now joins the ranks of the ECB, Bank of Japan, Central Bank of China, and the Federal Reserve in injecting stimulus efforts to kick start domestic and global economic engines.
BULLISH FOR COMMODITIES
We can debate the merit of these actions at a later date, as the continuation of printing money by central banks leads to an inflationary economy, making dollars cheap, while possibly providing an underlying bid into commodities like Corn, Crude Oil, and most notably Gold.
Investors in an all too familiar role have kept their eyes on the EU debt crisis and the domino effect it may have to EU member nations and the global economy. Recent downturns in the Euro seem to have played as a wildcard in the short term outlook, and may have influenced an immense effect on the Gold price in 2012, as it fluctuated in price between basically 1560 and 1630 from May to mid-August.
GOLD MOVE
When central banks around the globe reignited their printing presses, Gold broke out of its summer doldrums, and exploded up to highs for the year just below 1800. In my view, it is just a matter of time before Gold breaks out past $1800 making new highs for the year. Let’s remember when Gold broke through $1800 in 2011, Gold channeled all the way up to and past 1900. With central banks printing money and the Fed pledge for a low rate policy until possibly 2015, pressure will remain on the U.S. dollar.
TRADING IDEAS
I am offering a few conservative trading strategies to potentially take advantage of such a move. First trade is to buy the December Gold 1820-1840 call spread for 5 points, which is the risk on the trade for a max profit of 20. Or go further out-of-the-money by buying the 1870 December Gold Call and selling the 1900 call against it for 3.5 points with a max profit of 30. These bull call spreads define risk, because the cost of the spread is what’s risked on the trade plus commissions and fees. Please contact me for other trade recommendations, as the bull call spreads are just one way an investor can position trade his or her account for major breakouts or corrections in the market.
There is a significant risk of loss in trading commodities. Past performance is not necessarily indicative of future results. Only risk capital should be used. Losses from commodity investments may be greater than the initial investment(s). Commodity trading is not appropriate for all investors, and a commodity investment must be evaluated in light of the potential for risk of loss as well as the possibility of profit. If you are contemplating deep-out-of-the-money options, you should be aware that the chance of such options becoming profitable is ordinarily remote.
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What would a return to the gold standard mean? Read our feature story here.
