Gold: Probably Not the Next Big Thing
Is gold the next big thing? Gold is always a topic of conversation and everybody likes to own a little. But buying and selling it on the open markets is another story. Gold is neither trending, nor is it seen at extreme value or “overpriced” levels. Instead, it seems to have settled into a fairly comfortable price range held in check by nearly balanced fundamentals that could keep it there for awhile. It short, it’s fairly priced. Bulls and Bears have fought to a stalemate – for now.
That’s not a headline grabbing story. But there is plenty of money to be mined from fairly priced markets, if you know how.
But before you do that, you’ll want to understand the arguments for each of these camps. That will help you to better understand the market when these balancing factors start to shift again.
The Bulls Say…
Nations around the world such as Germany, the United Kingdom, even China are borrowing a page from the Fed and lowering interest rates in an attempt to spur growth in their economies. Theoretically, this course of action makes their currencies weaker. Investors in countries with lower currencies are attracted to hard assets. And there is no harder asset than gold. Thus, global QE is supporting gold prices by spurring international demand for gold.
At the same time, the US Central bank is poised to take the opposite tack by raising rates. This will theoretically strengthen the US Dollar, which could pressure gold prices. But with the US economy actually contracting in Q1 2015 (by 0.7%), odds are the Fed will wait until at least September and maybe longer before making any move. This has given the bulls more backbone – at least for a few more months.
The Bears Say….
Two things.
First, Gold is priced in US dollars. And despite Fed thumb twiddling and weaker US economic data in Q1, rates rising this year still seems likely. The US economy is still expected to grow by 2.6% this year*(*source: Kiplinger). That should be supportive to the US dollar, and thus bearish for gold.
No inflation. Gold is often used as a hedge against inflation. Thus, higher inflation, or fears of higher inflation can often be supportive of gold prices. But inflation in the US is all but non existent right now. If the economy keeps growing, inflation might inch up to 1% by December. That’s up from 0.8% in December of 2014. This is not supportive to gold prices.
Conclusion
That being said, gold now finds itself in a near perfect storm of balanced factors: Aggressive international quantitative easing and questions about the US economy supporting prices from underneath and expectations of Fed tightening later this year keeping a lid on upside breakouts.
For gold to rally $100 from it’s current price, the US economy would likely have to take flight on it’s own. Yet for the metal to fall another $100 per ounce, the global economy might have to soar, leaving the US behind. Neither is a likely scenario given the unprecedented interdependence of US and international economies in 2015.
Strategy
With a move of $100 per ounce unlikely in either direction (in our opinion) over the next several months, an option strangle with a profit zone $450 wide would seem to be high probability proposition.
December 2015 Gold
A gold “strangle”- selling the 950 put option and the 1400 call option. If gold is anywhere between these two strikes at expiration, both options will expire worthless.
Premium writers can sell the December Gold 950 puts and 1400 calls (strangle) for a total premium of $1,000 per strangle. Some old time option sellers also refer to this strategy as a “bracket.” By using this approach, you are in essence, putting brackets around the gold market – one at 950, one at 1400. If the market fails to reach either strike by expiration, both expire worthless and you keep both premiums.
December options expire on November 24th. However, that doesn’t mean you have to wait that long. At the very least, it’s likely you’ll be able to close at least one side months prior to expiration.
Your target on selling premium should be to be taking profits within 60-120 days. Even with December options, gold’s offsetting fundamentals could make this scenario a likely one.
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If you are a high net worth investor and would like to learn more about selling options on gold and other commodities, you can request our Complimentary Guide to Selling Options entitled The Option Selling Solution. Request your Free Copy now
James Cordier is the founder of OptionSellers.com, an investment firm specializing exclusively in writing commodities options since 1999. OptionSellers.com offers managed option selling portfolios starting at $250,000 minimum investment. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television News and CNBC. Michael Gross is director of Research at OptionSellers.com. Mr. Cordier’s and Mr. Gross’ book, The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014) is available at bookstores and online retailers now or at a special discount through the OptionSellers.com website. For more information visit www.OptionSellers.com
