Having dropped to an intraday $1051.1 an ounce and settling at $1,054 last Friday, the lowest level since the $1,045 reached in February 2010, Gold has risen this week. The spike in prices is most likely due to short covering ahead of Friday’s key unemployment report and in front of speeches in front of regional economic committee’s given by Fed President Yellen on Wednesday and Thursday (12/2-12/3). Gold rose to close Monday to $1,064 an ounce, while settling just below that level on Tuesday’s session. Gold and other dollar-denominated commodities are currently being pulled from the upper left to the lower right on the charts, mostly due to fluctuations in the U.S. Dollar, which touched a near 13-year high before falling back in the last few sessions. The most recent data from the Commodity Futures Trading Commission showed hedge funds and money managers raised their net short position in gold (bets the price will fall) to the biggest on record last week. “Assets in SPDR Gold Trust, the world’s top gold-backed exchange-traded fund, are at their lowest since September 2008,” said Reuters this week. Gold recorded its biggest monthly drop since March 2013 in November 2015.
All of this suggests that any rise might be a short-lived ‘relief rally’ and that prices will fall back. This would most probably happen after the release on Friday of a key jobs report, which will give a strong indication on whether the Federal Reserve will, as expected, raise rates in two weeks’ time. As rates rise tends to prompt falls in non-yielding commodities relative to income-generating assets. It will also give a further leg-up to the dollar, which would increase the expense of buying for overseas investors.
In my view I propose some downside exposure in the Gold market in the near term, but as a hedge against that potential occurrence, I would engage in some longer term call spreads against something else entering into the market that could be seen as bullish heading deeper into 2016. In the near term, to catch a move to the downside at possibly the 1020 level in Gold, I would propose the following trade. I would look at buying the February Gold 1030 put and selling 2 February Gold 990 puts for a $1.90 or in cash value $190.00 plus all commissions and fees. Long term upside exposure utilizes June 2016 options. I would look at buying the June Gold 1200 call and selling 2 June Gold 1280 calls for $1.50, or in cash value $150.00 plus all commissions and fees. The value here in my view is the cost of the trades for the exposure in the market. However the shorting of one extra call and put in each scenario means that there is risk below 990.0 in February futures and above 1280.0 in the June should the options get exercised.
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. Or please contact me at anytime at slusk@walshtrading.com
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.
