Confusion reigns in gold and at the Fed

Fundamentally, the December payroll number showed a disappointing 74,000 gain, the smallest number in about 3 years. There were forecasts of 193,000 and the revised number for November was 241,000 new payrolls. However, many experts seem to think that the Fed won't pay much attention to this report and will stay on the path in terms of tapering. I've read maybe another $10 billion taper in January. Funny because I could have sworn that the Committee would continue to be "data driven” paying particular attention the unemployment numbers and inflation.

It is again quite confusing these gold (COMEX:GCG14) fundamentals as Carl Tannenbaum, chief economist at Northern Trust here in Chicago told CBS's Marketwatch, "I don't think [the December payroll report] means anything for the Fed," adding "This isn't the happiest economic news but it's not a disaster." That doesn't imply the Fed will be "data driven” to me. According to Bloomberg, "The Fed minutes released Jan. 8 didn't describe a detailed schedule for asset-purchase reductions. The central bank will 'continue to do, probably at each meeting, a measured reduction' in the pace of purchases, Chairman Ben S. Bernanke said last month."

Again it sounds like they have a plan in place for tapering regardless of any economic data, whether it be jobs, inflation, consumer confidence, retail sales or any other type of economic data releases. "Data driven," yeah right, sounds like more confusing and mixed messages from the Fed.   

Technically, on the weekly gold futures chart below I have also added some of my favorite technical indicators. They are the 9-, 20-, and 50-day simple moving averages (SMA'S), Bollinger bands (BB's, light blue shaded area) and candlesticks. These indicators tell me that gold futures are in a short to mid-term "super-trend" down. I say this because the 9-period SMA (red line) has crossed under the 20-period SMA (green line) as both SMAs are pointing lower on very sharp angles AND the market itself is trading right on or just below the 9-period SMA (red line).

 The 9-period SMA is now, according to my technicals, the first area of resistance on this chart and as long as the 9-period SMA trades below the 20-period, the "super-trend" down stays in effect. The second area of resistance is the 20-period SMA (green line). Finally, according to my favorite technicals, the 50-day SMA (blue line) is the final area of key resistance. It is also important to point out the fact that all of my trend identifying indicators on this weekly chart are pointing down. Both the top and bottom lines of the BBs (light blue shaded area) and the 9-, 20-, and 50-day SMAs are all pointing lower on a nice downward angle. Remember, no technical indicators work 100% of the time. Only time will tell where we go from here.

 Weekly Gold Futures Chart 

 

OPTION PLAY

It is also important to note that trends can and do change at the drop of a dime with no warning whatsoever. So for those physical bullion buyers, in my view, buying gold on any sort of dip or pull back such as we are seeing now could work out very well in the long run. However, for options on futures over the next 45-120 days I remain bearish.

Also, if gold continues to be in a mid-term "super-trend" down on the weekly chart, there could be an abundance of potential option set ups. Everything from buying puts or bear put spreads in a 3-to-1 ratio with a specific hedge in the form of buying a call for protection to selling calls with unlimited risk. If the market trends sideways we can still sell calls, but that requires a very well-funded account, has unlimited risk, and is not for everyone.

About the Author
Matt McKinney

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.

Futures and options trading involves substantial risk and is not for everyone.

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