Gold prices fell more than one percent to their lowest in nearly a month on Tuesday, with uncertainty over stalled U.S. budget negotiations potentially denting investor fervor for the yellow metal. This seems to be one of the latest excuses for gold’s most recent pullback.
After breaking above $ 1750 the day after Thanksgiving, gold has been under assault, with any rallies being sold into. In my opinion, worries over the fiscal cliff may be one of the major reasons why gold sold off Tuesday. However, with the stock indices unchanged and the euro rallying above the 1.31 level, it seems to me that precious metals traders have possibly begun to take quarterly and yearly profits before employment data is released later in the week, or it is just simple liquidation of positions possibly by hedge funds at home or overseas. The action of outside markets Tuesday may suggest it is the latter.
Confidence in gold may have been eroded by memories of last December’s 10 percent price slide and disappointment that prices failed to break $1,800 an ounce when the United States announced a third round of monetary easing in September. However, smaller investors seem to be piling into the gold trade, which could suggest a top in prices, but that’s not necessarily the case.
GOLD COIN SALES
According to dealers, the last time we saw gold coin sales of this magnitude was actually in 2008, when gold moved from $900 an ounce, to eventually reaching 1700 an ounce.
CME Group says metals volume averaged 415,000 contracts per day in November, up 11% from 373,000 in the same month last year. The increase was even more dramatic sequentially, with average daily volume rising 51% from 275,000 contracts in October.
Meanwhile, the rolling average for the three months ending in November was 352,000 contracts daily. This was up from 309,000 for the three-month period ending in October, 327,000 through September and 330,000 through August.
The continued catalyst for a bullish gold market lies in the monetary policy of central banks outside of the U.S. Just yesterday, Australia lowered their discount rate a quarter point to three percent, while China continues to look to expand their reserves.
THE TRADE
If February gold tests and holds the November low $1674.3, look to buy out of the money call spreads using February gold options. I will look to buy the 1750 call and sell the 1775 call for a spread price of 3.5 points or 350.00. The cost of the trade plus commissions and fees is the risk on the trade, while the maximum you can collect is $2,500.00, minus commissions and fees. I am not saying gold is making a jump past $1775 before February option expiration, but in my view, I would be looking to sell this spread at 6.5 to 7 points if I can get filled for 3.5 points.
[Editor’s note: Lusk offers a free daily gold market newsletter. E-mail him for details. What do you think about gold? Is there still a chance for new all-time highs? ]
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