The US Dollar has been buoyed lately by Euro Zone contagion fears and today US banking frailties! Banking firms have opposed regulations hampering their abilities in the derivatives market with Jamie Dimon, the chief executive of JP Morgan Chase leading the opposition. Today, JP Morgan Chase had announced that it had lost $2 billion from a hedge strategy gone awry! Jamie Dimon further announced that there could be another $1 billion in losses once everything is tallied. Jamie Dimon gained his power banker clout while keeping JP Morgan one of the strongest banks during the housing crisis. The Volcker rule clearly bans banks from proprietary trading or trades executed for profit. This provision in the Dodd-Frank, the Wall Street reform and consumer protection act, allows banks to hedge portfolio risk. JP Morgan is the largest US bank with about $2.3 trillion in assets. It was thought that the losing strategy was a synthetic credit portfolio run by its Chief Investment Office. The banking entities have a vast array of assets from housing to business, making the review of hedging methods virtually impossible. JP Morgan had spent about $5.8 million fighting the banking regulations. The uncertainty in the marketplace may be changed for quite some time with the revelation that our huge institutions are vulnerable to market risk as one's own brokerage account may be. In light of this development in addition to some of the Euro news, traders may be back with the safe-haven; Treasuries, US Dollar and perhaps cash!
The JP Morgan news spread globally affecting the Euro Zone and Asia as well! The Greek Socialist party leader, Evangelos Venizelos was unable to create a national unity government. Greece's budget deficit for the first quarter widened by 23 % to $9.09 billion euros increasing from last year. Contagion fears are back with thoughts that the Greeks may leave the (EU) European Union. Fitch's credit rating agency commented that if the ailing country left the EU, all the European Union countries would run the risk of downgrades. Banking concerns have been quietly preparing for the return of the Drachma. Some banks actually never really erased the currency from years ago. The problem with that would be the exchange rate and exposure of the banks with loans in Greece. An exit plan has never actually been publicized, so the feasibility of the plan is unknown. The EU has further warned France and Spain to reduce their deficit by finding more cuts and tax hikes. Spain runs the risk of not meeting their deficit target of 3.0 % along with France. The New French President-elect Francois Hollande has just taken his office with the stance that progress should be made with growth and not reforms. Yet he now walks a fine line between reaching the necessary targets and pleasing the voters. The new French President has vowed to create 150,000 new jobs and raise spending by $20 billion euros. Both the economies are forecast to contract in the near term creating quite a daunting task for the leaders to reach their target goals. While the EU Monetary Affairs Commissioner Olli Rehn sees an economic recovery in sight, the situation is still quite fragile!
Currency traders added to net long positions to $20.95 billion last week from $13.31 billion in the previous week. The US Dollar was a notable asset of choice as traders shifted the risk allocation back into the safe-haven products! The US Dollar is in an uptrend! The June US Dollar is technically in buy mode! The high this week has been $80.48 and the low $79.63. The usual inverse relationship between the US Dollar and Gold is on for the moment! In times of fear and uncertainty, the safe-haven vehicles may move in tandem. In times of no fear, the safe-haven vehicles may not warrant the interest of traders. 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 down. The Exchange Traded Fund (GLD) was reported lower.
The June Gold contract has maintained a bearish bias for about five weeks now falling from the previous range! The decline may have been generated by the lack of any potential "QE3" news! The next couple of months will serve to allow the Fed to determine if another round of stimulus is necessary. When the Fed meets in June, Operation Twist will end and the country will be in pre-election mode. It seems unlikely that the current administration would benefit from the slowing growth and high unemployment. Gold has dropped with the risk assets as of late. Often when traders need additional money to support stock portfolios or other assets, they will liquidate their Gold positions to suffice for the need. Gold is also linked to the Euro FX as a risk asset. As they fear that Greece may leave the EU with all the chaos that would bring, Gold is liquidated in tandem paired with the currency. The JP Morgan debacle may have further exasperated the situation with hedge fund liquidation in expectation of harsher regulations overseeing the banking industry. Just when traders may be stopped out or run out of margin money, the Gold could flip as it has done in years past.
Gold speculators reduced their Gold positions by 23,563 contracts to 92,498 contracts last week. The SPDR Gold Trust increased holdings by 0.17 % to 1277.11 tons. The increase translates to 41,060,252.25 ounces. India's April Gold imports declined to $3.1 billion from the $4.7 billion from last year. The weaker Rupee may contribute to the poor import demand.
Iran is still in talks with the European Union Foreign Policy Chief Catherine Ashton who hopes that the nuclear research program is at the beginning of the end! They meet in Bagdad on May 23rd to resume negotiations. Iran is hoping to reduce the sanctions placed on it by the US and the EU. The financial constraints have forced Iranian business to be bartered in Gold and Rupees as the Iranian banks have even been banned from SWIFT transactions. The energies have come down in price as a result of increased production by Saudi Arabia and some global growth slowdowns. The Middle-east is still vulnerable to conflict until a resolution has been reached. Any potential conflict is regarded bullish for Gold along with any potential stimulus!
The worse the economic conditions in the US, the more potential for the Federal Reserve to introduce another round of stimulus. June may be the precise turn-around point for this market. $1550.00 is critical for this market.
In Summary! Gold is an emotional market that will reaction positively to global conflict, inflationary fears, monetary easing and a weakened US Dollar! This is the recipe for all Gold bugs!
While reaping the rewards of being a gold trader, one must be sure to use stops and money management to stay in the game! Retracements are possible. While I remain very bullish still - use stops - live to trade another day!
The JUNE Gold has reached a high this last week of $1644.00 and a low of $1572.00. I am in sell mode until the GCM12 should penetrate $1654.40. The current point of control or comfort zone may be $1583.70. This market may be setting up for another leg up, but must maintain levels above $1550.00. There may be a bounce to $1750.00 . 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. Now we may find the market potentially could climb to $2000.00 or much higher this or next year. 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: Options may be a way of participating in the market while keeping a prescribed risk and unlimited profit potential. While it may not give you the same profit, it may allow one to stay in without being bounced out with stops.
New potential option sample trade. Still in range! ($1100.00)
The Gold Digger Alert recommended to monitor the Gold options for December once support is established!
Buy GCZ12 $2000.00 Call for $20.00 or better. The risk on the trade is $2,000.00 plus fees and commissions. The expiration is November 27th 2012!
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.
Please call or email me for the complete recommendation to coincide with your risk tolerance, so that we may apply the correct Money Management. The Weekly Gold Digger is a Free Weekly subscription to receive trading opportunities by email along with fundamental commentary and basic technical points of interest.
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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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.
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A ‘'LIMIT MOVE'', IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED.