Bobbys Corner-Open Market-Aug.28.2009

bob-slade-forex-trading-3-150x200Good Morning:

The Greenback picked up overnight as US stock futures dropped after a report that China will be looking to curb overcapacity in industry, including steel and cement.
The Euro gained in early trading after the German IFO survey was higher than expected, but not strong enough to keep the Euro in positive territory.

Asian equity markets were higher-European markets are lower after some disappointing corporate profits.

Oil:$71.89 Gold:$948.50

Todays data:
Durable Goods: exp:3.0% prior: -2.5%
New Home Sales: exp: 390k prior: 384K

HAVE A GREAT DAY & GOOD LUCK

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Forex Gold Special

Now I,m telling to you about Forex Gold Information

The market action this week provided a great demonstration of why I mentioned in my last post that options on gold futures contracts were my favorite way to play the ongoing bull market in gold. As gold continues a profit-taking pullback prior to advancing to all-time highs, my margined gold futures contracts and FOREX gold and silver positions were all stopped out, preserving some of my profits, but also meaning that if the market had turned on a dime and shot back the other way, I would have missed out on some of the move up while I was still trying to decide where and when to get back into the market. Because the vast majority of my positions in silver and gold are in options on December 2008 futures contracts, those positions are temporarily down in value, but still in play to benefit from the inevitable turnaround.

This example shows in a nutshell why options are a great choice for investing in commodities that you are sure will move either much higher or much lower in the future, but can't be sure exactly when the big move or moves will occur. As discussed in previous posts, since you pay for an option in full up front, your loss is limited to your initial investment if it expires worthless, and that can only happen if you fail to roll it over prior to its expiration date. On the other hand, since futures contracts and FOREX positions are heavily margined, investors have to close them out quickly when the market starts moving against their positions, as happened to my margined positions this week. Futures and FOREX traders who do not do so quickly become former traders. So why does anyone trade margined positions then? Why doesn't everyone just trade options? The answer is that since you pay the full value of the option at the time you establish a position, you can't control as large of a total position size as you could in the futures, since you only have to make a small "deposit" when you establish a position in a futures contract, as discussed in more detail in previous posts. Like everywhere else in the market, taking greater risk creates the possibility of greater returns.
Options on stocks and Exchange Traded Funds (ETF's) were discussed in detail in my November 8, 2007 post. The main difference between options on stocks and options on futures is that a futures option gives you the right to buy or sell one futures contract at a set price at a set future date, instead of 100 shares of an underlying stock. Other than that difference, the underlying concept is basically the same. A speculator looking for the maximum leverage would purchase a futures contract on a given commodity, and would consequently assume the risk of greater losses than his or her initial investment if their margined position moved against them far enough before they closed it out. A speculator looking for high leverage, but also looking to avoid margin calls, would instead purchase options on a futures contract.
Let's look specifically at some examples for each method. As of this writing, with gold trading at $787 per troy ounce, a speculator with $10,000 could choose to control two full size 100 troy ounce gold futures contracts (leaving a $1,900 cash cushion), or 10 e-mini 33.2 troy ounce gold futures contracts (leaving a $2,300 cash cushion). The speculator could also choose to buy two call options that would give him or her the right to purchase two full size 100 troy ounce gold futures contracts at a price of $800 per troy ounce on November 20, 2008 (leaving a $180 cash balance). If the price of gold moved from $787 to $887 per troy ounce sometime in that period and the speculator decided to take profits at that point, the respective profits would be $20,000 for the two full size contract choice, $33,200 for the 10 e-mini contract choice, and $12,700 for the two call options.
The $12,700 profit on the call options represents a gain of just under 160%, but was achieved without having to worry about margin calls or getting stopped out of the position at a loss. True to the concept of greater risk taking opening up the possibility of greater gains, the margined futures contract positions were up 247% and 431%, respectively, but if at any time following the opening of the position the price of gold had gone down by just $4 to $783, the futures contract holders would have received margin calls asking them to deposit more money, at which point most futures traders would have closed out their positions. There is also the ongoing mental stress associated with holding heavily margined positions to consider.
Options on futures should only be considered by a speculator who has a very firm view of the future direction of a particular commodities market, as options can expire worthless if they are not rolled over. So the obvious question at this point in time is whether or not gold is certain to move significantly higher in the next few years. Since nothing is certain in this world except for death and taxes, a better question is what it would take for gold NOT to move significantly higher. The only scenario that derails the ongoing gold bull market is one in which: (1) the Fed embarks on an aggresive campaign to raise interest rates to protect the dollar, thereby throwing millions more homeowners out on the street than are headed out on the street already; and (2) the politicians in Washington embark on an aggressive campaign to cut federal spending on defense, Social Security, Medicare, etc. enough to generate huge annual budget surpluses for at least the next generation. Each speculator or investor will have to make up their own mind as to whether or not they see the above scenario coming to fruition anytime soon.

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Austrian CB Will Sell Next to No Gold Until 2014 Austria's central bank OeNB will only sell minuscule amounts of gold in the next 5 years. OeNB execut

Austria's central bank OeNB will only sell minuscule amounts of gold in the next 5 years. OeNB executive Peter Zoellner said in an interview with Austrian Press Agency APA that Austria has no plans to sell any significant amount. Austria is a member of the 18-strong CBGSA. According to the OeNB executive Austria owns a hoard of 280 tonnes that is stored in Austria, Switzerland and the UK for easy market access.
A report in Boersenexpress says that Austria may have sold 37.5 million troy ounces in the frame of the last CBGSA. It is believed that Austria has not sold any gold since 2007, following a very conservative but nevertheless profitable investment strategy this way. Zoellner had always emphasized that gold plays a very important role in monetary policy.
Having blogged about Austria's silver shortage to the tune of €1.2 bilion the central bank is also a gold lender. OeNB did not indicate the size of gold leasing with Zoellner only saying that it regarded only very small sums which are underlaid with secured collateral.

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New Central Bank Gold Sales Agreement Cuts Back on Sales

The ECB today released the extension of its central bank gold sales agreement (CBGSA) for another 5 years while cutting back planned sales from 500 to 400 tons annually.
Maybe central banks have rediscovered that gold reserves are undoubtedly the best performing asset class on their balance sheets. The CBGSA or Washington Agreement was signed by 18 central banks, with the Federal Reserve being absent like in the decade before.
From the ECB release (HT Beans, Rice and Gold):
In the interest of clarifying their intentions with respect to their gold holdings the undersigned institutions make the following statement:

1. Gold remains an important element of global monetary reserves.
2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2009, immediately after the end of the previous agreement. Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes.
3. The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.
4. This agreement will be reviewed after five years.

Bloomberg has a good write up on the matter, pointing out that the IMF has not signed the agreement, opening the possibility that the IMF's intent to sell 403 tons of its 3,217 ton hoard in one go to one country may become a reality.

“It’s positive for gold,” John Reade, an analyst at UBS AG in London, said by e-mail. Having the agreement “removes the small chance that European central banks would have dumped gold onto the market in an unconstrained manner.”

Central banks sold 73 percent less gold in the first half and full-year disposals may drop to the lowest since 1994, according to estimates from London-based researcher GFMS Ltd. The IMF wants to sell 403 tons from its reserves of 3,217 tons, the third-largest holding after the U.S. and Germany.

“The IMF has not signed and this leaves open the possibility that the Chinese, Russians, another central bank, could buy the 403 tons of IMF gold in one go,” Reade said.

China has the world’s sixth-largest holding at 1,054 tons and Russia is ranked 10th with almost 537 tons, World Gold Council data show...

The Swiss National Bank, one of the signatories to the new accord, in a statement today said it isn’t planning any gold sales in the near future, and that its gold is an important part of monetary reserves. Switzerland has 1,040 tons of gold, making it the seventh-largest holder.

Bullion sales under the current agreement total 140 tons in the current quota year, with France and the ECB leading sales, the World Gold Council said July 29. Central banks have sold about 3,867 tons since the first agreement, and failed to reach the allowed limit each year since 2005, its data show.

Central banks of China and Russia will probably be delighted to see their efforts to build up larger gold reserves helped by European central banks at low prices. China has overtaken India as the largest gold importer this year.
In the long run the massive sales of gold may be seen as the biggest fallacy of central banks next to their premature rate cuts, leaving them now out of ammo.

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