What a Week!
Fundamentals
Volatility has returned to the futures markets, as concerns over the European debt crisis as well as a steep sell-off in equities markets has put traders on edge. Outside events have made the release of the usually highly anticipated April Non-Farm Payrolls report seem relatively unimportant, despite a better than expected gain in payrolls last month. Payrolls rose by 290,000 last month, which is well above the 200,000 gain analysts estimated. In addition, March payrolls were revised upward to 230,000, vs. 162,000 announced last month. The biggest negative in Friday's report was the rise in the unemployment rate by 0.2% to 9.9%, although the rise was attributed to a jump in the labor force, as formally discouraged workers are once again looking for work and are now counted in the official employment figures. Although the economic outlook for the U.S. appears to be turning for the better, traders still fear the situation in Europe, as the debt crisis facing Greece and possibly other EU countries remains unsettled, due to potential liquidity concerns for some European banks. In addition, the election results in the U.K. show no political party having a clear majority, leaving the formation of a government unsettled. Among the biggest beneficiaries of the uncertainty rattling the financial markets has been Gold futures, which have staged a sharp rally during the past few sessions, with the most active June contract trading well above the 1200.00 level, as investors move to gold as a store of safety -- especially given the wild swings seen in the forex markets the past several weeks.
Trading Ideas
Given the heightened volatility in the markets lately, options on Gold futures have become relatively expensive. This makes buying Gold calls outright much more costly. One way some traders may wish to help offset this cost is to explore bull call debit spreads in Gold options. The benefit of buying a debit spread is the premium received from selling an option will offset the price of the option purchased. The down side is that the potential gain is limited if Gold moves higher than the strike price of the call sold. An example of this type of trade would be buying the August Gold 1230 calls and selling the August Gold 1300 calls. With August Gold trading at 1212.00 as of this writing, the call spread could be purchased for about 23.50 points or $2350, not including commissions. The premium paid would be the maximum risk on the trade, with a potential profit of $7,000 minus the premium paid should August Gold be trading above $1300.00 at option expiration in July.
Technicals
Looking at the daily chart for June Gold, we notice the market attempting to test the highs made back in December of last year. The recent rally has come on higher than average volume, indicating fresh buying entering the market. Despite the uncertainly in the financial markets the past few days, the run-up in Gold prices has been relatively orderly, which can be viewed as a positive for Gold prices, as a panic-driven rally is usually a sign of a market putting in a major top! The 14-day RSI has moved into overbought territory, with a current reading of 72.20. 1230.00 looks to be the next resistance point for June Gold, with support found at the 20-day moving average, currently at 1163.00.
Mike Zarembski, Senior Commodity Analyst
