Gold futures have hovered around the 1150 level for the last five or six sessions. The sell-off from just above the 1200 level was predicated by the stronger than expected March unemployment report.
The report fueled speculation that rate increases would begin by the Federal Reserve sooner than some expected. A more hawkish tone by the U.S. central bank would stand in stark contrast to what other central banks have enacted around the world to jump-start sluggish economies and decreased liquidity. Due to a reduction in the unemployment rate, investors are pricing in a possible quarter point hike, with spikes in the U.S. dollar as one of the results.
Gold simply hasn’t enjoyed any safe haven buying globally as physical buying has waned in recent weeks most notably in China and India. In fact, India in February failed to reduce import duties on the yellow metal, discouraging physical demand from the world's number one physical Gold buyers.
Investors continue to pour into the dollar and stock indices as investments of choice amid global uncertainty. Central banks around the world—highlighted by the European Central Bank—have initiated quantitative easing to deal with economic crisis’ there along with currency debasement in China, Japan, Australia, and Canada, to name a few that followed suit in some fashion. Gold’s failure to have a sustained bounce or rally off of bullish news has become decidedly bearish. Hence we have seen the futures price drift down below the 11.50 level, coming within ten dollars of the 1132.0 November low.
The Fed ends their two-day meeting today. The question is, will their statement be seen as hawkish, or will they revert back using a more “patient” tone on rates citing headwinds globally and weak retail and housing data?
If the Fed’s statement is seen as bearish we could see some reversals in the dollar and precious metals sectors. If seen as hawkish the market could eventually test the yearly S1 at the 1111.0 level. I therefore propose the following trade: Using April options, look at buying the April Gold 1110 put and at the same time buying the April Gold 1200 call for 5 points, or in cash value, $500.00. The risk on the trade is the price paid for the option spread plus all commissions and fees. If we trade sideways for the remainder of the week, I would suggest liquidating the trade by week’s end as options expiration for April Gold is next week.
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.