#SaxoStrats: Gold facing near-term correction risk
Ongoing central-bank experimentation with negative interest rates and asset purchase programmes have been the main driver behind the bullish sentiment in gold so far this year.
Following the Brexit vote in the UK on June 23, gold jumped and has since established a new and higher range. During the past couple of weeks, however, there have been several failed attempts to break higher along with the appearance of some inverted hammers. This shows that gold has on these occasions received a boost during the trading day (lately from dollar selling attempts) but has failed to follow through.
Federal Reserve chair Janet Yellen is due to speak at Jackson Hole on August 26. Taking the US presidential election in November into account, there is an outside risk of a rate hike on September 21. We view the uncertainty before as a greater risk to gold than the actual event. The focus on a rate hike, combined with the near record long held by speculative accounts in the futures markets, has raised the risk of a near-term correction just like the one seen back in May.
We're looking to sell the Sep 16 130/132 call spread, buy 125 put.
Management and risk description
This is a dynamic trade as the value of the low delta put will rise progressively should the expected price weakness unfold, not least considering the expected pick-up in volatility. On that basis we do not expect to keep the trade to expiry.
Janet Yellen’s Jackson Hole speech on August 26 and continued dollar weakness are key risks.
From a seasonal perspective gold has risen every August the last five years while into September it has shown losses in four out of five.
• sell GLD:arcx 130-132 call spread, expiry: Sept 30 at $0.64, delta -10%
• buy GLD:arcx 125 put, expiry: Sept 30 at $1.40, delta -31%
• total cost: $0.76 = 1.4 (paid for put) – 0.64 (received on call spread)
• reference price: 128.48 resulting in a synthetic delta of -41%
Maximum loss: Limited to $2.76 or 2.1% on a close above 132.
Target: 123.15 or lower
Time horizon: 44 days.
— Edited by Martin O'rourke
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