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TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS.
The COMEX GOLD market, like many markets in the U.S., is impacted by the sovereign debt issues in Europe.
Fundamentally, the Comex Gold market as of recent, has been the beneficiary of a falling U.S. Dollar (as measured by the U.S. Dollar Index futures contract). Typically and historically Gold Futures has an inverse relationship with the U.S. Dollar Index futures market. When the USD rallies or falls, the Gold market tends to move in the opposite direction. The U.S. Dollar Index Futures topped out recently back on January 13, 2012 at 82.04 and since then its been in a strong downward trend and made a new low for the move on January 27th at 78.89. Last December (the 29th) Comex Gold Futures were trading at a low of $1,523/ounce; which was the bottom of the recent rally. Since then, Comex Gold rallied to a high for the move of $1,739/ounce on January 27, 2012. That is a $216 dollar-per-ounce move in about one month. This is, to me, extremely exciting when you take into consideration the leverage that is involved in trading futures.
The contract size for the COMEX Gold futures contract is 100 troy ounces. That means that every $10 move in the futures price or in a gold option premium, is equal to $1,000 change in contract value. So the $216 per ounce futures price movement over the last month equated to a $21,600 change in contract value. Note: Leverage can work for you and against you AND that futures and options do not necessarily move in tandem. The CFTC defines Leverage as the ability to control large dollar amounts of a commodity or security with a comparatively small amount of capital.” Leverage is one factor which makes futures trading so high risk.
I am of the opinion that one of the reasons that the Gold market made a move like this is, is because the U.S. Dollar fell so much. I also believe that primary fundamental behind the Dollar’s fall has not been due to US economics but rather the Euro’s rally. It's the Euro that's been pushing around the markets, in my view. And this leads to risk-on/risk-off analysis of Gold and its relation to the Euro.
There is a relatively new school of analysis with the idea that Gold is a risky investment and with the sovereign debt issues in Europe there has been much talk of the "risk-on" and "risk-off" trade. This interpretation, in its most basic form, looks like this. Gold moves higher when things are “okay” in Europe and it falls when things are not going well in Europe. So the trend recently has been that when the Euro Currency is slumping because of the problems with Greece for example, then the USD rallies and the "risk-off" trade is on and Gold prices tend to fall. The opposite dynamic is that when issues settle down in Europe and things are going okay then the Euro rallies, the USD falls and the "risk-on" trade is on and Gold moves higher. This whole idea of Gold going up when the "risk-on" trade is on is very hard for me to get used to. I've been a Broker trading Gold Options for about 15 years and Gold has almost always been a safe haven trade or a flight to quality trade. Also Gold, in the past has had the reputation of moving higher when there is economic uncertainty or fear. Well if that were now the case it seem obvious to me that Gold should move higher if there is fear and worry about the sovereign debt issues in the Euro Zone. That does not appear to be the case. So an old school guy like myself has to get used to the idea of Gold being traded as a riskier asset class. In the end I believe the trend higher in Gold will continue over the coming days and weeks and I will be making option presentations to my clients in the Comex gold market, but rest assured I'll be watching the Euro and the USD every step of the way.
Technically, I see the Comex Gold Futuresmarket still in a SUPER-TREND higher as the market trades above both the 9 day SIMPLE MOVING AVERAGE and the 20 day SIMPLE MOVING AVERAGE as the indicators both point higher on sharp angles. Another important technical in my opinion would be the new high for the move that Gold made here on the last day of the chart. This particular move started back on December 29th when the market bottomed at $1523/ounce. Notice on a daily chart that each bar represents a day. Finally this is also the highest price for Gold since back on December 8th. See daily chart below.
Chart source: www.Markethead.com/2.0 Quote data provided by Barchart.com
OPTIONS PLAY
A potential strategy could be to buy April Gold Bull Call Spreads or April Calls. All option strategies involve substantial risk and are not suitable for everyone. I often present to my clients who buy Call Spreads or Calls, to buy in a 3 to 1 ratio, and use a Put option to help protect against a MAJOR correction in the market.
Futures and options trading is speculative in nature and involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources . All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.
Click Here for a free download of our CME Report on Precious Metal Trading Strategies Using Options on Futures (or copy and paste in your browser, (http://www.zaner.com/3.0/mmckOptionsMetals.asp)
Learn more about the Long Term Super Trend by downloading my free report HERE (http://www.zaner.com/3.0/mmckSuperTrend.asp?rID=Kitco)
Additional charts, studies, and commentary can be found at: http://markethead.coM/2.0/free_trial.asp?rid=McKinneyKitco
By Matthew McKinney
Zaner Group
January 31, 2012
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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