A Victim of Its Own Success?
Fundamentals
"Go for the Gold" was not only the motto of most Olympic athletes, but apparently of speculators as well, as the cumulative net-long position of large and small speculators has approached record levels. According to the Commitment of Traders report, the combined net-long position of Non-Commercial (large speculators) and Non-Reportable (small speculators) traders in COMEX gold futures and options totaled 324,388 contracts as of May 11th, which was a gain of just over 19,000 for the week. This surging long position was just below the record combined net-long position of 328,344 contracts which occurred back in October of 2009. Ironically, the near-record long position occurred just days before the gold market made at least a near-term top, with the June futures trading just below the 1250.00 level. Since that time, the "flight to liquidity" caused by continued uncertainty surrounding the European debt crisis and its effects on the fledging global economy, caused investors and traders to rush to the sidelines, which triggered a rout of long liquidation in many commodities, including Gold. In the span of a week, June Gold has fallen over $80 per ounce, as weak bulls exited the market and those late to the party licked their wounds. Another potential reason behind Gold's less than stellar performance this week could be due to traders liquidating their Gold position to help meet margin calls caused by losses in other markets, such as equities, treasuries, and energies. Although Gold's upward climb has been rather orderly in U.S. Dollar terms, it has been a much more parabolic rise valued in Euros, Pounds, or Yen, which certainly could lead to liquidation selling by traders who believed the market has moved "too far too fast." Although it is certainly too early to tell if the gold market has put in a significant top, or if we are only in the midst of a "correction" before the next move higher, the potential for increased price volatility in the "yellow metal" near-term certainly appears likely.
Trading Ideas
For those traders fortunate enough to have been long Gold futures for some time, the recent sell-off has traders questioning whether to cover their long positions and potentially miss another run at all-time highs, or hold tight and risk further erosion should prices continue to fall. Some traders facing this dilemma may wish to explore how using options on Gold futures could provide a tool to help control potential losses, while still allowing for some upside potential. An example of such a strategy would be the purchase of a bull call spread. Employing this strategy, the trader would buy a lower strike call and at the same time sell a higher priced call. For example, with August Gold trading at 1186.30 as of this writing, one could buy an August Gold 1200 call and sell an August Gold 1300 call for about 28.00 points, or $2800, not including commissions. The premium paid for the spread would be the maximum potential risk on the trade, with a potential profit of $10,000 per spread minus the premium paid should August Gold be trading above 1300.00 at option expiration in July.
Technicals
Looking at a daily chart for June Gold, we notice prices have closed below the 20-day moving average for the first time since late March! Although this is considered a bearish short-term signal by some momentum traders, the uptrend line drawn from the February 5th lows is still over $45 away, coming in at the 1135.50 area, which also corresponds to the location of the longer-term 100-day moving average. This so called "line in the sand" should be heavily defended by Gold bulls, as a close below this key area could spur further selling pressure as sell-stops are triggered. The 14-day RSI has moved solidly back into neutral territory, with a current reading of 48.90. With support seen at the 1135.50 level, the nearest resistance point would appear to be at the 20-day moving average near the 1196.00 area, with major resistance found at the contract highs of 1249.70.
Mike Zarembski, Senior Commodity Analyst
