Alternative Access to the Gold Futures Market Using Euro Dollars

Breakout of Gold Futures Price on Sept 12, 2007 

In 2007, Gold futures made two attempts (one in Feb and one in Apr) to break the $700 psychological level, but to no avail. But finally on Sept 12, 2007, Gold futures price broke above US$700 and this attracted my attention (see Chart 1).

Chart 1: Daily Chart of GC-SpotV on Sep 12, 2007
(Source: ProfitSource)
(click here for larger view) 

In Chart 1, you will see that before the price breakout, DM+ crossed above DM-, and if you are a conservative trader, you can always wait for ADX to cross above 25 before putting the trade.

How to Determine the Profit Target

In Chart 2, I have used the Aug 2007 low and the early 2007 Oct high as my low and high points to establish my profit target based on the ABC feature, which is available in the Safety in the Market Module in Profitsource. For the purpose of this article, let’s assume that the target will be US$828.70.

Chart 2: Daily Chart of GC-SpotV showing how we use ABC Method to determine the profit target
(Source: ProfitSource)

Alternative instrument to GC-SpotV

Now, here is the question: If you do not have a futures brokerage account or if you are not prepared to trade Gold futures, how could you participate in this market? So, let’s look for an alternative trading instrument and one of them is EURO.

In Chart 3, I have overlaid the Daily Chart of the EURO/US$ Pair [FXEUUS in Profitsource] on the Daily Chart of GC-SpotV in Profitsource.

Chart 3: Overlay of Daily Charts of GC-SpotV and FXEUUS
(Source: ProfitSource)

As you can see in Chart 3, EURO appears to have a strong correlation with the Gold futures price. In other words, the stronger EURO against US$ is, the higher the Gold futures price should be. I think Chart 3 illustrated this point clearly.

Now that you know EURO might be your alternative trading instrument but you also do not have a forex brokerage account, you may be asking this question: how can you trade EURO? Well, it is possible if you have an equity and options account because you can use Currency Shares Euro Tr (FXE), which is the currency shares listed in the New York Stock Exchange or ISE Fx Euro Index (EUI). This is why I believe it is a good way to trade EURO using FXE and EUI; both are optionable. This means that you can continue riding on the trend by making adjustment on your options trade. This is not possible if you were to trade the asset directly.

Some Observations

Here are some of my observations when using FXE and EUI: 

1. You should note that for FXE, EURO is the base currency while for EUI, US$ is the base currency. This means that if you are bullish on EURO, you should adopt bullish strategy if you are using FXE. If you are using EUI instead, you need to adopt bearish strategy. Please do not mix them up.
2. At the time of this writing, the bid-ask spread for EUI options in my view is narrower than that for FXE options. I would prefer to trade instruments that have a narrow bid-ask spread. So, at this point of time, I tend to prefer EUI options to FXE options when participating in the Gold futures market. It does not mean that I disregard FXE options. When it is getting more popular, I would expect FXE options’ bid-ask spread to be narrower too. To me, it’s just a matter of time.

I hope you will learn a new way to participate in the Gold futures market. Again, if you like this trading idea, please backtest it and see if it works for you.

Good trading!

Jack Wong 
Staff Writer
Optionetics.com ~ Your Options Education Site