Gold on the Run, Pricing in More Fed Moves
By Richard Ilczyszyn ISSUE 609 | SEPT 2007
Gold futures have been on the run, responding with a sharp move up after the Federal Reserve cut the Federal funds rate 50 basis points on September 18 to 4.75 percent, the first Fed rate reduction in four years. There is typically an inverse correlation between gold and the U.S. dollar, which sank to a record low against the euro in the wake of the Fed action. Gold is priced in U.S. dollars, and dollar bear markets have typically triggered gold rallies. The euro reached $1.4130 against the euro, the highest since its 1999 debut.
COMEX gold futures passed their 2006 high of $732 an ounce, rising above $735 on Tuesday, September 18, and beyond. Gold is now at its highest price since 1980, when spot gold hit $850 and futures hit $875. Back then, the Fed funds rate was 14 percent, the prime rate was near 20 percent, and inflation was a big issue. Some market participants fear last Tuesday's Fed move could cause inflation to rear its head, and gold is often considered an inflation hedge.
I'm bullish gold, but don't want to chase this rally. I recommend waiting for a larger pullback to establish a long position. This market has seen a sizeable move, and a downside correction would be healthy within the overall bullish trend. Watch for a trade and close under $728.50, which could extend the loss to $718 or $715, which I feel are good spots to buy. I feel this market could go to $690 or even $680 and still be within an overall bullish trend, as pullbacks in my view are related to profit-taking. I recommend buying December futures on a corrective move down to near the 21-day moving average, around $715-$710, which also coincides with the September 13 low. We should see support there. I'd recommend using a protective stop at $685, just below the current 50-day moving average.
For more conservative traders, you can buy the futures, and also buy a put at that price for some protection on the downside if the market does start to move against you. But the way interest rates are playing out, with expectations this Fed move may not be the last this year, gold is looking up.
Please feel free to contact me regarding these trading strategies or any other questions you have about the markets, and ask about our special half-off commissions offer for new clients.
Richard Ilczyszyn is a Senior Market Strategist with Lind-Plus, Lind-Waldock's broker-assisted division. He can be reached at 800-605-0095 or via email at rilczyszyn@lind-waldock.com.
Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.
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