"Risk" Off
Today's Idea
The long liquidation selling in Gold futures may provide those looking to go long Gold on a price-break an opportunity to get back into the market once the dust settles. A trading strategy to consider might be selling puts in Gold future options. For example, with August Gold selling at 1519.30 as of this writing, the August Gold 1245 puts could be sold for about 3.30, or $330 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in late July should August Gold be trading above $1425.00. Given the risks involved in selling naked options, traders should have an exit plan in place should the position move against them. For example, some traders may wish to buy back the options prior to expiration should August Gold close below chart support at 1464.10.
Fundamentals
Thursday was a rough session for commodity bulls, as prices fell in sharply in nearly every sector, with energies and grains leading the flight away from "risk". The reasons for the weakness were numerous, starting with Wednesday's end of the June FOMC meeting when the statement released confirmed what most Americans already knew -- that the economic recovery is moving much slower than the Fed had hoped, and that the Fed does not know how long the economic malaise will last. If this weren't enough, the weekly unemployment claims report showed a larger than expected jump in claims last week, which rose by 9,000 to 429,000. Most analysts were expecting a modest decline of 1,000. Then a surprise announcement made by the International Energy Agency (IEA) that it will make available 60 million barrels of Oil from strategic reserves over the next 30 days starting next week shook the energy markets, sending Oil prices down over 5% and narrowing the Brent vs. WTI Crude spread. All these catalysts combined with a rising US Dollar tied to the continued concerns over the Greek and European debt crisis were the final straw that triggered the "risk off" liquidation of commodity positions. The sharp drop in Gold prices may have come as a bit of a surprise given the economic uncertainly, but long liquidation in Gold may be due more to funds needing to cover losses in other markets rather than investors abandoning their "safe haven" investments. If true, the recent sell-off may lure buyers back into the Gold market should prices fall below $1500.00 in the next few days.
Technical Notes
Looking at the daily chart for August Gold, we notice that prices have moved below the 20-day moving average, which may have spurred some short-term momentum selling. More importantly, the uptrend line drawn from the January lows has been taken-out on the downside, and unless prices move above this line in the next few trading sessions, we cannot rule out a test of the 1500.00 area, or even further selling caused by sell stops being triggered below this psychological support point. The 14-day RSI has moved back into neutral territory with a current reading of 47.80. Major chart support is seen at the May 5th low of 1464.10, with resistance seen at Wednesday's high of 1559.30.
Mike Zarembski, Senior Commodity Analyst
