Gold Bites Back
Following four successive days of decreasing prices, gold made a turnaround on Friday from $1118, the moderate rally continued into this week reaching $1141 high on Tuesday. Fears of further slides in the stock market may create longer-term upside momentum in gold price as investors scatter to find some refuge in precious metals. Gold may also seem more attractive if there are no signs of an imminent rise in US interest rates from the Federal Reserve.
Last week gold fell 3.5% on a weakening global economy, lead by China, and the possibility of a Fed interest rate hike was around the corner. Yesterday’s 4-week Treasury-bill auction, a short-term debt obligation backed by the US government, gave yield of 0.00% down from 0.045% on the previous auction indicating that interest rates will not rise as fast as previously expected. The Fed could still hike rates but it would come a big surprise to the markets, which is something the Fed has been trying to avoid. It is looking more likely that a rate hike will happen in December as long as economic data is strong enough to warrant it. Job creation and signs of inflation are the main indicators monitored by the Fed.
What to Look Out For
Friday’s Non-Farm Payroll numbers, expected to see a rise of 223,000 in US jobs for August, is an extremely important data release to watch out for. As Yellen, Fed Chairwoman, has repeatedly stated they are looking very closely at signs of strong job creation to decide on when they will begin raising rates (for the first time in 10 years).
Looking at the day chart below, we can see price has moved into the Ichimoku cloud (pink lined area) which acts as a level of resistance. We are still under the possible influence of the double top formation (blue area) which is a reversal indicator, as this type of pattern can influence the next 10 to 15 candles of price action. The stochastic oscillator (middle chart window) shows the signal (light blue line) line below the slow line (red dotted line) signaling that momentum is now on the downside. This has not been confirmed by the MACD (bottom window) which is also a momentum indicator as the blue vertical lines are above the signal line, showing upward momentum, however the lines are small meaning low momentum for the upside at present.
How to Trade Gold (XAU/USD) Price Action...
Using Option trades it is possible to create limited risk positions in the gold market. The following are trade examples set-up on the ORE Web-Platform.
Trade 1: XAU/USD to rally
If you expect NFP data to be weaker than expected which could trigger gold to rally, you may buy a Call option because a Call gives you the right to buy gold at a certain price (known as the strike) up until an expiry date. As gold price rises above the strike price the option gains in value and you may profit. The cost to buy the option ('open premium') is your maximum risk. You can close the option at any time before expiry to lock-in profit or reduce a loss.
The image below shows a gold Call option to buy 10 ounces at $1139.00 over the next 7-days and it costs a 124.20 USD premium to open the trade.
The Call will generate income as gold price rises above $1139, for example if gold is trading at $1169 ($30 above strike) by expiry the Call will payout 300 USD. If gold does not rise and expires at or below 1139, the option will have no value and you will lose the open premium.
Trade 2: XAU/USD to fall
If you expect a positive NFP figure and gold price to fall, you may buy a Put option because a Put gives you the right to sell gold at a certain price (strike) up until an expiry date. As gold price falls below the strike the option gains in value and you may profit.
The below gold Put option to sell 10 ounces at $1138.00 over the next 7-days costs a 122.28 USD premium.
The Put will generate income if gold falls below $1138, for example if gold price falls to $1100 ($38 below strike) by expiry then the option will payout 380 USD. If gold does not fall and expires at or above 1138, the option will have no value and you will lose the open premium.