Safe Haven No Longer?
Fundamentals
Gold bugs may not want to hear this, but Gold futures appear to be losing their longer-term bullish momentum, with the lead month August futures falling to 12-week lows. Some traders' views that the global economy is improving can be partly to blame for Gold's recent weakness, especially as concerns over the European debt situation have lessened in recent days. Ironically, the recent recovery in the value of the Euro vs. the U.S. Dollar may have also played a part in Gold's decline, as traders begin to unwind long Gold and short Euro positions that gained speculators favor during the height of the European economic turmoil. Even the recent recovery in the U.S. equity markets has had a negative effect on Gold, as investors move back into equities and away from precious metals. The most recent Commitment of Traders report shows that speculators have lightened-up on their long Gold positions, with the combined non-commercial (large speculators) and non-reportable (small speculators) net-long position totaling 238,128 contracts as of July 20th. Although this long position is well off the record 328,344 net-long contracts being held for the week ending October 20, 2009, it is still a formidable one-sided position. Should near-term chart support points come under pressure, we may start to see further long liquidation selling as protective sell-stop orders are triggered.
Trading Ideas
Traders who believe that the Gold bull-run is at least temporarily over but who want to minimize the potential risk of a bearish position should prices reverse to the upside may wish to explore trading strategies utilizing options on Gold futures. One such strategy would be selling a bear call spread, where a trader would sell a call option at a particular strike price and trading month and at the same time buy a call option at a higher strike price than the option sold in the same trading month. An example of such a trade would be selling the September Gold 1190 calls and buying the September Gold 1220 calls. With October Gold trading at 1060.50 (September Gold options go against the October Gold futures) as of this writing, this spread could be done for about a 6.0 credit, or $600 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if October Gold is trading below 1190.00 at option expiration in late August. The potential risk on the trade is 30.00, or $3000 minus the premium received, and would be realized at expiration should October Gold be trading above 1220.00.
Technicals
Looking at the daily chart for October Gold, we notice a potential double-top formation made in late June, as the test of the contract high of 1267.10 that occurred on June 28th failed to make a new high. In fact, prices closed near the lows of the session and set the stage for the over $100 per ounce decline in prices we are currently seeing. The sell-off really accelerated to the downside once prices closed below the 20-day moving average. The 14-day RSI is approaching oversold territory, with a current reading of 32.50. The widely-watched 200-day moving average is now in play and offers near-term support around the 1150.00 area. Should this support level fail to hold, a test of the April 19th lows near the 1128.00 area is possible. Should support hold, the next resistance point is seen at the 20-day moving average near the 1200.00 area.
Mike Zarembski, Senior Commodity Analyst
