Gold futures surged for a second straight day Tuesday nearing a two-week high. This may have been influenced by potential inflationary concerns out of Japan, along with reports that Germany intends to repatriate the gold that is being stored at the Federal Reserve Bank of New York.

LACK OF FAITH
This action may be seen as supportive for gold prices. In my opinion, there appears to be a lack of faith in fiat currencies that are being eroded by central bank involvement. Japan’s recent policy change toward a weaker yen, coupled with the Federal Reserve’s ongoing bond purchases, may, in my belief, be making gold a more attractive asset.

FED COMMENTS
Fed Chairman Ben Bernanke spoke Monday at the University of Michigan and reiterated that the U.S. economy still was not yet out of the woods. Bernanke’s comments essentially were in line with a speech given by Chicago Fed President Charles Evans, who spoke Monday and reaffirmed that the Fed would provide more quantitative easing in the near term.

Dovish remarks from Evans and Bernanke possibly added a bullish bias to gold prices more than a week after the Federal Open Market Committee released minutes among its voting members as to when the central bank might end its easing programs. A few members said stimulus should end well before 2013, others said it should conclude at the end of 2013, and some reiterated the need to commit to a more accommodative position.

TARGETING MORE GAINS
The gold markets reaction to the aforementioned news has been mildly positive so far. With gold settling above the 1680 level, I’m looking for a continuation of this rally that could see the market challenge late 2012 highs near the 1750 level.

TRADE IDEA
For a conservative position trade I am looking to buy the April gold 1740 call and sell the April gold 1770 call for a purchase price of 5 points or $500.00. The risk for the trade is the price paid for the spread plus all commissions and fees. In this instance, the risk would be $500 plus commissions and fees on the trade. The maximum you could collect on the trade would be $2,500.00, if both strikes finished in the money at the time of expiration, minus all commissions and fees. In lieu of trying to buy a dip in the futures market, this position may offer the investor a good risk to reward ratio of almost 5 to 1 and doesn’t eat up margin. More aggressive traders can add multiple spreads.

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. 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.

[Editors’ note: Lusk writes are free daily gold outlook. E-mail him here to sign up.]