Still "Golden"!
Fundamentals
It was only about 3 weeks ago that some traders were beginning to tout the "end" of the bull market in Gold, as prices looked poised to break below major support at the 1150.00 area. However, this "bull" apparently still has some fight left, as prices have since rallied over $80 per ounce and it appears that investors are confused regarding whether the global economy, particularly here in the U.S., has slowed. Gold appears to have found buyers looking for a "flight to safety" investment, as well as those fearing rising inflation down the road due to mounting government debt. Choppy trading in equities has also brought renewed interest into Gold, as traders look to establish positions in a "trending" market. Physical traders are also noting that Gold buying out of India is beginning to increase as the country moves toward the traditional wedding season. What is really unusual is the seeming disconnect in Gold prices form the action of the U.S. Dollar. Looking at a chart of the Dollar Index and comparing it with Gold, we notice that the rally in gold prices accelerated after the Dollar Index recovered off its recent lows! This action is contrary to the previous thought that a weaker Dollar would benefit gold prices. Also of note is the strong rally in U.S. treasuries occurring in tandem with Gold the past few weeks, which may be confirming the belief by some analysts that investors are looking for alternatives to equities for investing. The most recent Commitment of Traders report shows both large and small speculators adding to their combined net-long position, with an additional 10,104 contracts added as of August 10th. Gold prices have rallied an additional $40 per ounce since the report was released, and we should see additional buying by speculators in today's report. Although the combined net long position in Gold futures now totals nearly 250,000 contracts, it is still well below the record 328,344 contracts seen in October of 2009. This leaves further room for additional buying to emerge before the market really appears to be overbought.
Trading Ideas
With support at 1150.00 in the October Gold futures surviving its test, some traders may wish to investigate trading strategies that could benefit if prices hold above this key chart point. One example of such a trade would be selling puts with a strike price below the 1150.00 support area, such as selling the October Gold 1145 puts. With October Gold trading at 1233.50 as of this writing, the 1145 puts could be sold for about 3.30, or $330 per option, not including commissions. The premium received for selling these puts would be the maximum potential profit and would be realized if October Gold is trading above 1145.00 at option expiration in late September. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such exit strategy might be to buy back the short puts before expiration if October Gold closes below the recent lows of 1157.50.
Technicals
Looking at the daily chart for December Gold we notice that prices are now well above both the 20 and 200-day moving averages. Notice how the sell-off ended quickly once prices failed to move below the 200-day moving average. The 14-day RSI is strong, with a current reading of 65.70. If there is one negative seen in the recent bull run it's that volume has started to decline as the rally has unfolded. One reason for this could be the number of traders on holiday, especially in Europe, as the month of August is famous for lower trading activity on "the Continent". 1250.00 is now seen as the next resistance point for December Gold, with support found at the 20-day moving average near the 1200.00 area.
Mike Zarembski, Senior Commodity Analyst
