Wednesday’s gold rally prior to the FOMC policy announcement release occurred on two fronts with the first being short covering ahead of the Fed’s policy statement. The short covering was predicated on news that number one world gold buyer India has lowered its gold import tariff because of softness in the world economy. This is good news for gold bulls as demand from India in years past has been insatiable. However recent duties on gold imports the last few years have hampered gold purchases in India leaving black market purchases as a secondary source of import to illegally avoid paying the government duty.
The recent rise in gold price up to 1169.8 in late August was in my view due to economic problems in China. There was an outflow of Chinese money out of US Treasuries that rekindled safe haven buying in gold along with the sizable selloff in U.S. equities that also promoted gold’s appeal. The rally was short lived on two fronts with one being profit taking ahead of the Fed announcement and secondly the recovery of global bourses most notably in the U.S. and China. Despite the Fed announcement tomorrow that will no doubt rattle commodity markets, it is largely seen as a one and done scenario should the Fed hike rates a quarter point. Recent speeches by Fed officials have been seen as hawkish for short term rates but the actual FOMC meetings themselves have been seen as dovish. Because of the inconsistency in message,I believe the proper course of action going forward is to have some exposure on both sides of the gold market into the FOMC.
I therefore propose the following options strangle in to the FOMC meeting. The strategy calls for buying the October 1160 call and at the same time buying the October 1080 put for 4 points, or in cash value $400.00. The risk on the trade is the cost of the trade plus all commissions and fees. This is purely a volatility play as October options expire on September 24th, leaving a week for a sizable move following the FOMC.