Going for the Gold – Again!
Fundamentals
After a brief downward correction during the past couple of weeks, Gold bulls have re-asserted themselves on Thursday, sending prices up over $50 per ounce to new contract highs, on the aftermath of the Federal Reserve's announcement regarding round two of quantitative easing. The Fed announced that it will purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, and also reinvest the proceeds from maturing mortgage securities, which could bring the total closer to $900 billion. This flooding of Dollars into the financial system has sent the Dollar tumbling and commodities soaring, with the precious metals sector among the biggest gainers. Gold prices are now trading within a hair of the important 1400.00 level. It is this willingness by the Fed to "promote" inflation as a better alternative to deflation that has traders and investors moving into Gold and other assets as a hedge against continued Dollar weakness. In addition, holding Gold, which pays no dividends or interest, is more appealing during a period of exceptionally low interest rates, which appear likely to be around for awhile.
Trading Ideas
With the bull market in Gold futures back on track, some traders who like to sell options to take in premium may wish to explore selling puts in Gold futures with strike prices below chart support levels. For example, there appears to be good chart support in December Gold near the 1315.00 area. With December Gold futures trading at 1381.70 as of this writing, the December Gold 1300 puts could be sold for about 2.30 points, or $230 per contract, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized if December Gold is trading above 1300.00 at option expiration less than 3 weeks away. Risk management is essential for those traders selling naked options, and one protective strategy could be to buy back any options sold before expiration should the December futures close below support at 1315.60.
Technicals
Looking at the daily chart for December Gold, we notice that for the past year, Gold has followed a pattern price consolidation followed by a rise up to new highs. We are in the midst of the third such consolidation so far this year. With prices having moved to new contract highs late in the session, we may see additional buying by trend-following systems entering the market today, which has the potential to move Gold prices to a test of 1400.00. After moving to an extremely overbought reading of 85.9 back in October, the 14-day RSI has moved back to a more reasonable, but still strong reading of 63.40. Support is seen at the recent low made back on October 22nd at 1315.60, with resistance found at the psychologically important 1400.00 level.
Mike Zarembski, Senior Commodity Analyst
