The U.S. government posted a record $1.4 trillion deficit in the 2009 fiscal year ended in September as tax revenues plunged and spending soared.
The Fed is unlikely to raise interest rates for the better part of 2010, as they fear doing anything to upset the fragile recovery taking place in the US economy. This means fund managers will need to look outside of interest rate products in order to “put money to work.”
Investors looking for the “story” in the gold market for 2010 need only focus on those two facts.
Forget about physical gold demand from India, rising gold production costs, or holiday jewelry sales. The gold market has disconnected from it’s physical fundamentals and will most likely remain so for much of 2010. The theme of the gold market is not supply/demand fundamentals. It’s the massive expansion of US sovereign debt and the mounting global concern about the nation’s ability to pay it back. That theme will play out in 2010.
Which means that this month’s correction in gold prices was probably little more than a blip in a longer term bullish trend. The big picture economic factors that drove the bull trend have not gone away. In fact, they are intensifying. Just this week, GMAC asked for another 3.5 billion in bail out money. It appears they will get it.
The deficit in the first two months of the new fiscal year already stands at $296.7 billion.
Total debt as a percent of GDP has risen from $1.65 in 1982 to $3.70 in 2009.
The current administration has flatly stated that nothing will get in the way of the economic recovery. Which means, the coffers remain wide open, massive treasury auctions will continue (as long as there are buyers) and interest rates will remain at zero.
The economic recovery probably will continue. But there will be a price to pay. This will be in the form of a frightening US interest payment on debt. This will continue to foster concern over the US ability to manage this debt and will keep the longer term trend in the dollar moving lower.
This will almost ultimately lead to higher prices in gold.
This does not mean prices cannot fall in the short term. This does not mean prices will go to $2,000 an ounce in 2010. These are simply the hard, cold facts. Interpret them as you wish.
Perhaps they are not useful to the short term trader trying to time the market’s near term ebbs and flows. But for option sellers, a long term fundamental theme can be delicious.
December Decline an opportunity for Bulls
In this particular case, the decline in gold prices in late 2009 appears to be nothing more than hedge fund redemptions. As investors redeem capital at year’s end, funds are forced to liquidate positions to pay out. In 2009, one of the most popular trends has been in gold. As the year ends, it appears to have been a good place to take profits. The bounce in the dollar has helped make the decision easier for managers.
However, as investors look to reallocate capital in early 2010, gold should begin to regain its footing. If the price trend in gold resumes higher in the new year, December’s pullback in prices may end up looking like a “gift” to bulls looking for a place to go long.
The US debt will remain the 800 pound gorilla in the room for some time. Gold prices could do a number of things in the short term. But it is unlikely they will fall out of bed. And as a put seller speculating on market direction, that’s as close as you have to get.
We advise investors take advantage of the December price weakness to sell deep out of the money puts well beneath the gold market. A steady to weaker gold market should result in slow time deterioration. A resumption of the uptrend in gold will bring about much faster premium decay.
Only a sharp and sudden drop in gold prices could push distant put premiums close to risk parameters.
With a 1.4 trillion Federal Deficit, that seems unlikely.
To learn more about selling options in the commodities markets, feel free to visit us on the web at www.OptionSellers.com. A complimentary option selling information pack is available for qualified investors.
