Gold futures suffered its largest weekly loss in the last five as a wild week in equities and energies, to name just a few sectors, had recent longs booking profits, while others evened up positions ahead of option expiration on September 26th. Gold was able to post an eleven dollar rally on Friday, despite some signals from Federal Reserve governors that a rate hike was still on schedule for the Fed’s next meeting in September. Data on Friday showed U.S. consumer spending picked up a bit in July, offering further evidence of strength in the economy that could keep the door open to a Federal Reserve interest rate rise this year. This followed Thursday's upward revision in U.S. economic growth in the second quarter to 3.7 percent from the initial estimate of 2.3 percent.
Most of gold’s losses for the week came on the heels of wild gyrations in the stock market on Monday and Tuesday, which at one point had the Dow down over 1000 points in trading on Monday before global bourses recovered later in the week. The market was also assessing comments on policy normalization from Fed officials attending the Aug. 27-29 Jackson Hole Economic Symposium. Two top Federal Reserve officials who have pressed for interest rate increases said on Friday that a spate of violent swings in financial markets won't knock the U.S. economy off its feet. Many have questioned gold’s safe haven appeal lately, given all the global headwinds most notably from China, but the fact remains that weak gold prices have failed to spur physical demand in Asia, with premiums in India slipping, and those in China still hooked on volatile equities. Simply put, it will be hard for gold and silver, for that matter, to sustain any rallies without physical buying particularly from China and India. This brings us back to the Fed. It is my contention that unless something else enters into the market, both gold and silver will remain range bound or trade within a reasonable range until the Fed meets later in September.
Those looking to be protected on both sides of the market into that Fed meeting and policy announcement may consider the following options strangle to potentially capture a bigger protracted move in the market. I would propose buying the October gold 1180 call and selling 2 Oct gold 1240 calls for upside exposure, while at the same time buying the Oct gold 1080 put and selling 2 Oct gold 1020 puts for 5 points or in cash value $500.00. The risks on the trade are the price paid for the options plus all commissions and fees. The Fed policy announcement is on September 17th, while October gold options go off the on September 24th.
