The Swiss franc has taken a nosedive this morning, and at the same time, gold has sparked. It appears to us that some of the safe-haven buying in the franc is being unwound rapidly amid a Swiss interest rate cut and likely currency intervention. We expect investors to continue moving into gold, which should drive the price of June futures above $950 an ounce.
Today, Swiss National Bank (SNB) lowered its main lending rate to 0.25 percent from 0.5 percent and said it would buy corporate bonds as well as currencies. According to a Bloomberg report, the action would mark the SNB’s first solo intervention in the foreign exchange markets since 1992. The Swiss franc fell 3 percent following the announcement, declining to 1.1914 versus the U.S. dollar. CME Group June Swiss franc futures were last trading near 84.180. The Swiss are intentionally weakening their currency, which has been acting as a safe haven for investors. It appears foreign investors are now selling out of their Swiss franc contracts and moving straight into gold.
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April gold futures were last up $17 an ounce above $927 and the June contract was last up $16.60 at $929.50. We see this rally extending a bit further and recommend a call spread to take advantage of this trend. Consider buying the $950/$1,000 June gold call spread, for a cost of about $1,500 not including commissions. That represents your defined risk on the trade. Your potential gain if the market continues to move up would be $3,500, not including commissions. These options expire on May 26, 2009, so you have some time for the market to reach your target.
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