Gold has hit new record-highs above $1,240 an ounce, and while I think we could see further gains, the market could also see volatile corrections. If you have a position on now on either side of the market, I think it’s prudent to hedge.
Given the volatility, I see gold as a traders’ market right now, and not one for buy-and-hold investors unless you are very well capitalized. There is some uncertainly in the marketplace related to debt problems in the Eurozone, which has been driving investors to gold. In the past, gold has also been a hedge against inflation.If you are long gold right now, hedge! Protect your wealth.
If you are worried about gold topping, you can go into the option market and buy a June 1200 put, for example for about $450, not including your commission costs. If gold breaks $1,200, you have some protection until these options expire. If you are long gold futures, I also recommend taking profits on 10 to 20 percent of your of your position. Lock in your wealth now.
If you aren’t in gold and want to be, I don’t recommend chasing it at these levels. There will be downdrafts that create new opportunities to get in. Gold has gone up for many reasons, and looks bullish to investors for many reasons, but timing can be difficult.
Another way to protect your downside risk is by selling calls at your target price to pay for puts on the downside in the same month as your futures. For example, you might sell 1350 December gold calls, and you would collect $5,100 each in premium, not including commission costs. You would then buy 1170 puts for about $4,900, not including commission costs. If gold falls to $1,170, this will protect your downside risk, and you get the benefit of reduced margin with this type of strategy. I caution that this strategy can be a risky trade if you don’t how to execute it properly, so I recommend you work with a professional if you aren’t familiar with options.
If you are short gold, I also think you need to hedge in the event we get more bearish market news that drives gold to new heights. You could buy 1260 calls, for example. Gold could be up or down $100 in one day’s time. It’s a difficult market to pin a forecast on right now.
Gold and the Dollar
Historically, gold and the U.S. dollar have had a strong inverse relationship, as gold is priced in dollars. Right now, we have some disconnect in that relationship. Investors are viewing both gold and the dollar as safe havens. Gold is more likely to move inversely to the euro right now. The blue line in the chart represents the 50-day moving average, and I think it’s certainly possible the market could pull back that far, even in a day or less. We can see similar pullbacks of this magnitude.
Right now, I think you have to have a strategy if you want to invest in gold, you can’t set it and forget it. A close above $1,250 could bring $1,325 as a target, but at the same time, if we see signs of investor fear abating, gold could quickly correct. Look for the S&P 500 to move and close above 1,170, for the CBOE Market Volatility Index (VIX) to move up, and for some stability in the euro. Some of the safe-haven bid that’s benefited gold could be unwound. I think there is a $20 – $40 risk premium right now in gold. We can see how events creating uncertainty among investors has tended to lift gold.
One other strategy to keep in mind if you are leery of gold at these heights is to consider silver. The ratio between gold and silver is a bit out of whack, so if you feel gold is expensive, you might want to look to silver. Please feel free to contact me regarding more specific ways to manage your risk, and participate in this markets with appropriate strategies.
Richard Ilczyszyn is a Senior Market Strategist at Lind-Waldock. He can be reached at 800-605-0095 or via email at rilczyszn@lind-waldock.com. Follow him on Twitter at www.twitter.com/LWRIlczyasyn.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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