Forex Market Commentary
What on earth is it about this shiny stuff that else drives men's minds mad in pursuit of it's divine metal?
Once again the rumor mill has driven small traders to the point of despair trading gold futures up in the face of irrationality
"There is nothing you can talk to me about that I don't already know!" and as the old adage goes ... 'Buy the rumor, sell the fact'
Ok now and thank you Mr Goldfinger for drawing our attention to some good old fashioned reality. According to the statistics portal for global gold production some 3000 mt of gold ore was mined in the year 2015 and this follows from 2990 mt of gold ore production for 2014 and 2800 mt of gold ore production for 2013. In fact in the last 10 years never has there been an annual increase in gold ore production greater than 5 %
Now, let's look at this rationally. If today's price of gold bullion was 1,200 USD per ounce and for arguments sake let's assume that gold ore production fell by 5% and hence prices would follow suit down. Well, 5% of 1,200 USD is a mere 60 USD. Moreover, given that the industrial and retail commercial requirement for gold remains consistent year on year out within a fluctuation of 5% then how would one account for price movements of 10% or ever 20% in any given year? Taking into account that over the last 10 years in particular, in times of trouble, investors have bought US Treasuries and Swiss Franc as a 'flight to safety' in place of gold. Yet again, one would fail to understand the rational basis for large price movements.
Now the biggest buyer of physical gold by far in 2015 was China with some 660 mt of gold bullion imported for last year.
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| Earn Learn Forex Now |
Knowing that Chinese traders are reknown for driving a hard bargain it would be very hard to imagine a crowded auction room of Chinese buyers without the power of buyers to reduce offer rates below even the London Fix. Consider also that gold miners are facing a heap of problems like rising production costs and increasing debt which is not going to be conducive to increasing the rate of global production. Add to this fact the actual problem of physically owning and storing bullion and the fact like the CME charges a haircut of some 15% and changing constantly for the actual withdrawal of a deposit of bullion, then we find that the actual purchase of bullion bars is cost-prohibitive to anyone apart from central banks and bank and bullion dealers. So where does all this price expansion come from? It comes from speculators who live in a world of fueling tension on prices in a market which is very closely equated to demand and supply equilibrium. This is not like soybeans where sudden burst of heat or rain can damage a crop and threaten world production figures. The production of gold ore is not as hazardous as agricultural products. Should a reader understand the economic fundamentals of the bullion market then the technical information of charts reflecting price movement could be be better understood within a rational interpretation and better more informative trading decisions can be taken. A trader always needs to read in between the lines of any report that can be found on the internet these days.
So now turning to the cash futures for gold April 2016 we have as follows:
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| Courtesy Omega Research |
In January 2016 the US stock market sold off as the US Fed threatened 4 rate hikes and the USDX took a tumble from it's high mark of 99. As US equities tumbled with USD traders bought gold. Eventually US equities recovered fast to regain its losses. In March 2016 gold attempted to push through the 1,280 mark and failed largely due to the gaining strength of US equities and the consolidation of the USDX at the 94 level. Then this week gold tried once more to push through the 1,280 though this second attempt was more half-hearted than the last and quickly evaporated yesterday into a retreat.
For technicians looking at gold charts, currently in the short term, gold support is strong at 1208 (28/03/2016) but the failure this week to break through the resistance at 1284 (11/03/2016 high) is largely foreboding. A short term bear market is emerging with traders eying the next support at 1182 (08/02/2016 low) which if broken will pile up even more pressure that may lead to a complete rout. The long-term technical structure for an upside momentum is becoming weaker and traders expect a huge battle at the 1045 (05/02/2010 low).
A futures and options play on gold may have run as follows:
To sell the future contract the close of price Friday 22 April 2016 was 1,232 USD on the July 16 future, since the April just expires, with GBX gold at 4388/3250 USD initial/ maintenance margin.
With the Put options on the July contract we have as follows for a 1270 strike - Gold (GCN16) 1270 Put (PGCN161270). the premium comes in at a whopping 58.6 and would require a deposit of +$5,860.00 with about 90 days to expiry since the April contracts have just expired.
The costs of a futures trade are indeed prohibitive for the smaller trader who must remember never to risk his portfolio exposure to more than 5% on a single trade.
Since gold usually moves in an inverse relationship to the USD price direction then the trade on gold could also be coupled with a trade on the USDX future. Costs on the USDX for a long trade reflecting the short gold outlook would have required USD 1958/1450 initial/ maintenance margin and would have run as follows:
With the call options on the July USDX we would have been looking at CDXN169300 2.815, thats strike 93 at premium 2.815 and computed at the market as an outlay of +$2,815.00 with about 90 days to expiry.
That's a large amount of outlay to take a short position on gold coupled with a long position on the USD to reflect the growing value of USD at the expense of a decline in value of gold.
For smaller traders there are binary options which could have smaller outlay in the couple hundred Dollars but there again some of these binary platforms are very, very unflattering to deceive in terms of potential longevity.
Now, keeping in mind the theme of gold bullion and the small trader wanting to take a short position, I am going to show you how a small trader can expand the battle theme over gold to look at other angles to take a gold position. There are also equity options that can spring to mind where the price of the stock of the mining company almost perfectly mirrors the price movement of gold bullion.
One such company I have in mind is Newmont Mining Corporation, based in Greenwood Village, Colorado, USA, is one of the world's largest producers of gold, with active mines in Nevada, Indonesia, Australia, New Zealand, Ghana and Peru tradi8ng as NEM on NYSE.
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| Courtesy stockcharts.com |
With the obvious rapid failure of gold and the growing certainty to a technical double-top with the stock price trading at 31.23 I was able to rapidly pick up cheap put options on NEM with strikes 1-2-3 out at around USD 350 - 400 on Sept 16 puts. Sept 16 expiry on the put options gives the small trader a whole world of time premium. i compute my target exit on the put options to reach 3 Dollars above the current 200 day m. a at 20 USD with an expectation of the market for NEM stock to decline to the 23-25 USD range to mirror gold bullion falling to 1,180 USD at the London fix.
Always remember that major commodities like crude oil, gold and other metals tend to move inverse to the direction of the USD value in most years. i.e if the USD is declining in price then the demand for gold, oil and metals increases and vice versa.
A trader has to remember that a battle can be fought on several points of the field. Skirmishes can take place at the center in the futures markets where huge numbers of force would have to be applied to take up a strong central position in futures and options. But also watch those flanks where reliable platform providers can provide position access for a short skirmish and also look on your other flank at the equities or bonds markets where you can run your mind over mining companies stock and debt as well as tracker funds in precious metals and other commodity funds and their respective prices.
Thus the main tenet of the battle maybe to push the opposition downhill with the strength of a main short position; yet the field of conflict can be expanded towards the flanks where skirmishes of equal interest can take position and rapidly add to your growing momentum of a short gold/ long USD battle.
Pieter Bergli - Trader X16
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