The US Dollar Index has fallen today to a low of $81.565. Monday set off the week with New Home Sales rising to a 320,000 unit pace last month up from May's reported 300,000 units. This may encourage investors to buy assets that could be considered more risky rather than to rely on the safe-haven properties of the US Dollar. Monday's Stock Indices traded higher as the earnings outlook for FED EX were raised. Our Gross Domestic Product (GDP) expanded to a 2.4 percent annual rate. Initial Jobless Claims for the State Unemployment aid dropped 11,000 to 457,000 which had been slightly better than forecasted.
The Euro-Zone also had a series of reports supporting the price action on the Euro FX this week. The Euro FX is currently fragile, but in a buy mode technically. As Central Banks increase the percentage of allocations in Euro's, the US Dollar will potentially decline. The US Dollar is technically bearish unless it is able to penetrate $83.19. The weekly range was $82.815 - $81.565. While the comfort area for this market may be about $82.00, it could consolidate anywhere down to $81.00. The fairly weak data from the US this week has pressured the US Dollar, but given a boost to some of the other currencies such as the Canadian Dollar and the Japanese Yen. When analyzing the price action in the markets, it is vital to monitor the US Dollar and its relationships with the other markets. Some of our reports such as the Consumer Confidence may show a slight recovery, but the overall view might regard our recovery as sluggish.
We usually see an inverse relationship between the Gold Market and the US Dollar Index, but when we experience such uncertainty in the markets, the safe-haven products may move together. The ICE Futures U.S. Dollar Index (USDX®), is the international value of the US dollar and the world's most widely-recognized, publicly-traded currency index. By using the Dollar Index, traders can take advantage of moves in the value of the US dollar relative to a basket of world currencies or can hedge their portfolio of assets against the risk of a move in the US dollar in a single transaction. US Dollar Index futures are traded for 22 hours a day on the electronic trading platform of the Intercontinental Exchange (ICE).
Why am I elaborating on the US Dollar as a Gold Trader? While the US Dollar remains weighted against the six major currencies, Gold may be boosted by a variety of factors: It is purchased as a safe-haven by investors shifting from low interest bearing government bonds and other products that cannot keep up with the rate of inflation. The Gold may be traded in physical bullion, ETF's, XAU, Spider Gold Trust and futures contracts to name a few. Typically, in years past, the currency of a country could be backed by physical gold. The XAU has traded higher. The Exchange Traded Fund (GLD) reported holdings unchanged.
The Gold Market had begun the week with a high of $1194.80 this last week, while extending to a low of $1155.60.
Today it was evident that funds were allocated to the US T-Bonds trading up $ 1^27 to a high of $128^24. The interest rates, although quite low, has attracted a great deal of buying interest. Allocations of the safe-haven investor typically can be the US Dollar, T-Bonds and Gold. We will often see the wave of buying move from one investment to another as market sentiment and price action dictate.
The Gold Market has retraced approximately 6% from the previous highs, yet is still vulnerable to further selling action. Each time that we reach key support areas, we find buying interest to support the Gold Market. This week we had physical demand from India, Indonesia and Thailand. We are approaching the Festival Time of August through November for the India purchases.
While todays rally spurred some appeal for the Gold Market, it may potentially have been set off by short covering rather than entries to hold the metal. While I am short-term bearish and not ready to call support on the Gold Market, I remain long-term bullish.
Gold
The August Gold has reached a high this week of $1194.80 and a low of $1155.60. I look for support around $1148.00. If this support is taken out, we may find the Gold Market trading $1138.20. If the $1155.00 holds, this may be a reversal for Gold traders. We need this market to breach $1200.00 the get any momentum behind it. We will continue to see resistance levels to conquer such as $1225.00. This will take time. I do not anticipate hitting any highs quite yet. Seasonally, we may see more in the fall. Those who hold long positions may want to trail stops to protect any accumulated profits or prevent losses.
While I am long term bullish this market, it is essential to have a trading plan with worst-case scenarios in mind. Once you accept the risk of the trade, then all you need do is follow the plan. Intra-day trading, we do bracket our trades with precise stops. The use of stops, while prohibitive may allow an account take smaller losses during some very large market moves. To live to trade another day! The use of options with futures positions and/or option strategies may again keep the risk at a specific level. While I am cautionary during these economic conditions, my long-term objective on the Gold Market into 2010 was $1365.55 or higher prior to the new tax on import rule from India. Now we may find the market potentially could climb to $1326.00. Gold is still a Safe-Haven market that seems to hold value during most economic conditions.
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New Potential Trades and Trade Follow-up:
The sample trade had expired at a loss by not reaching the target.
We have until July 27th on this sample paper trade as the market has been adverse to this trade.
Those filled on the sample paper traded Example below may exit the trade when the futures go to $1275.00.
Sell August Gold $1245.00 Call and simultaneously Buy the August Gold $1275.00 Call at Market.
An example of a potential trade set-up - Bull Call Spread!
Buy August Gold $1245.00 Call while you simultaneously Sell the August Gold $1275.00 Call for a premium of 10. The risk would be $1000.00 plus commissions and fees. The potential profit approximately $3000.00 less commissions and fees. The expiration is July 27th, 2010. The market must reach $1275.00 to target maximum profit potential.
For those traders that wish to participate in the Gold Market with a defined risk. An options strategy would potentially work better than a futures position. The Buyer of an option pays a premium for the option, which is a right to a long (Call) or short (Put) position in the futures market at their selected strike price.
The premiums of the Gold Options may be inflated after the increased volatility and market move.
Aggressive & conservative traders may stand aside until the market has retraced..Please call for finer tuned trades daily.
The CME Group announced that they are introducing Mini Gold Kilogram contracts to meet the increased interest of investors. The smaller contracts may allow investors to participate in the Gold Market with less margin.
Due to the fluctuations in this market, please consult with your broker, or call us to strategize a risk management plan in line with your personal risk tolerance. Traders that wish to participate in the Gold Futures Markets may look at the E-Mini Gold contracts which have a lower margin requirement than that of the larger Gold contract. Please look for current margins before entering this market and be sure to allow cash cushion for any adverse conditions. Please consult with your broker to calculate the risk, stop loss orders or option strategies before entering such a volatile market. Investors that wish to take a position in the Gold Futures market should devise a plan according to their goals, risk tolerance and the amount of money they are willing to risk in this sector. Like many other investments, the success of the trading plan must take into consideration the timing of the entries and exits.
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Take a close look and feel free to call in and talk to me in greater detail. It would be my pleasure. Good trading!
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Risk Disclosure
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. Daniels Trading is not affiliated with nor does it endorse any trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or services.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
