The recent volatility in gold prices has left not only investors and traders puzzled about what is going on with the precious metal. “Nobody really understands gold prices and I don’t pretend to understand them either,” Federal Reserve chief Ben Bernanke told the Senate Banking Committee on Thursday July 18th in response to a question on why gold prices have been volatile. But as the Fed has tempered expectations for tapering to a gradual withdrawal with no hike in short-term rates, the dollar has pulled back and gold has found support. Gold, which entered a bear market in April, struck a low of $1,179 on June 28.
BULLISH BIAS
Gold has also broken above several technical levels in the past few days, closing over the April low of 1321.50 on Monday. It also is experiencing backwardation (in which the expected spot price is below the price of a futures contract), a situation that usually supports a bullish bias. It potentially tells you that the demand for the commodity is strong. We have also seen as the same sort of backwardation in the crude oil market where prices have broker out to $108 a barrel.
BIG EVENT RISK AHEAD
Technically the market closed like a freight train on Tuesday, reaching a daily high of $1347.40. in afternoon trading. This possibly sets up a move higher in the near term potentially back up to 1365.0 this week. Keep in mind, next week we have two major events and releases that will most likely have the attention of all investors. The first being the two day FOMC meeting, next Tuesday and Wednesday, with the second being next Friday’s unemployment report.
SEASONAL BUY PATTERN
Any continued run-ups in Gold could possibly be met with some profit taking next week before the all-important data releases. Technically if Gold can hold the 1297-1300 area, I would propose at going long the yellow metal using October options. Seasonally we are potentially heading into a seasonal buy pattern in late August into September highlighted by Indian wedding season. In my opinion, demand from India, the world’s number one consumer of Gold, is insatiable during this period and the appetite for Gold from India’s jewelers is robust.
Given this premise, I believe there may be an opportunity for a classic spread strategy. I will look at buying the October Gold 1400 call and selling the October Gold 1450 call for a purchase price of 6 points, or in cash value, $600.00. The risk on the trade is the price paid for the spread plus all commissions and fees. In order to ensure buying this spread at this price, the underlying October futures will most likely need to pull back to the 1315-1320 area. Should both strikes finish in the money before expiration, the maximum collected would be around $5,000.00, minus all commissions and fees and the original cost of the spread.
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RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
