Gold Trading and the China Effect

A higher interest rate scenario in the US also means that Gold may not be so attractive, as Bonds will

Last week’s devaluation of the Yuan created a surge in Gold price over the following two days as investors turned to the shiny metal in search of a safe haven. Since then the past 4 trading sessions has seen price remain within a fairly tight range between with most action between $1126.00 and $1110.

China is the world’s number three market for Gold demand but the devaluation of its currency may have a negative effect in the longer run as Gold quoted in US Dollars becomes more expensive. Last Friday China’s biggest Gold Bullion ETF (exchange traded fund), Huaan Yifu Gold, reported a third consecutive outflow of funds.

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The general strength of the US Dollar against most currencies, especially of Gold producing countries adds to the downward pressure for gold, as these countries can sell Gold at lower US Dollar prices and still receive a decent price as their currency weakens. A higher interest rate scenario in the US also means that Gold may not be so attractive, as Bonds will start carrying higher coupons.

This evening at 7pm there will be a release of the FOMC (federal open market committee) minutes, this could shed more light on the timing of the next interest rate rise in the US, Gold could fall in price if there are clues to the timing of the rise being in September. The close range that the market has been trading in over the past four days may be broken as volatility could increase after the minutes are released as new information hits the markets.

Technicals

Looking at the day chart we can see how price has recovered from its most recent low on July 24th of $1077.20 and has since touched a new high at $1126.72 on August 13th. There seems to be a major correction in the long term down trend, this is probably more due to the market being oversold than a change in fundamentals, which still remain bearish for Gold. Price has wandered far away from the 34 day Moving Average, as price tends to eventually retrace back to that line, I would expect a reversal of the current short term bull trend.

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Trading Gold with options

If you think the minutes release will show a slower timetable for interest rate hikes and that the price of Gold will continue to rally over the next week; then to take advantage of this price move you can buy a Call option which gives you the right to buy Gold at a set price (strike) by a set date (expiry) and for a specific amount.

In the below option example traded via an online platform, you can see that a Call with strike $1121.91, expiry 7 days for 10 ounces costs you a total of $96.55 which is your maximum risk. If price moves above $1131.47 you will earn more than the cost of the option.

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If you think price will trend back down again over the next week, then to take advantage of this price move you can buy a Put option; which gives you the right to sell Gold at a specific strike and up to a specific date.

From the screen shot below you can see that a Put option with an $1122.17 strike, 7 day expiry for 10 ounces would cost you $95.67 which is your maximum loss. If price ends up below $1112.60 on expiry you will receive more than your cost.

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