Gold Bulls Take a Breather after a Record Year
Today's Idea
Although Gold futures look poised for a potential short-term correction, long-term Gold bulls may wish to use any price correction as an opportunity to sell out-of-the-money puts in Gold options. Looking at the daily chart for lead month February Gold, we note the 200-day moving average currently near the 1250.00 area. Bullish traders who believe that this support point will hold for the next several weeks may wish to explore selling Gold puts with a strike price below this level. For example, with February Gold trading at 1369.10 as of this writing, February Gold 1240 puts could be sold for about 2.10 points, or $210 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized should February Gold be trading above 1240.00 at option expiration in late January, about 6 weeks away. Given the risk involved in selling naked options, some traders may wish to have an exit strategy in place should the position move against them. One such strategy would be to buy back the options sold before expiration should February Gold futures post a weekly close below the recent low of 1317.40 made back on October 22nd.
Fundamentals
After a nearly $300 per ounce rally since the start of 2010, the bull market in Gold looks a bit tired, as prices are beginning to stage a moderate correction as the year comes to an end. Since reaching a new all-time high of $1431.10 in the lead month futures on December 7th, Gold prices have slipped about $70, as a stronger U.S. Dollar and higher long-term bond yields have taken some of the shine off commodities as an investment. Higher interest rates could be the wild card for precious metals prices, as traders weigh the benefits of "attractive yields" vs. the carrying costs associated with owning Gold, which pays no dividends or interest. However, any significant sell-off in Gold could be met with fresh buying -- especially from Asian investors, who may be looking to diversify the risks associated with holding currencies and long-term government debt, particularly in light of the financial turmoil seen in the E.U and the mounting government debt load here in the U.S. Many metals traders are still awaiting any market reaction to a CFTC proposal that would limit the size any one speculator can control in a group of 28 commodities, which includes precious metals. With Gold prices up over 25% for the year, it should come as little surprise that many traders may wish to book profits as 2010 comes to a close and avoid potential volatile trade during the next couple of weeks, as liquidity begins to wane and traders and dealers take time off during the holiday season.
Technical Notes
Looking at the daily chart for February Gold, we notice prices have fallen below the 20-day moving average, which is providing short-term momentum traders a reason to lean on the short-side of the market. However, longer-term traders will note that the 200-day moving average does not come into play until the 1250.00 level. Until prices move below this level, the bull market will remain intact. Like the Silver chart highlighted earlier this week, there appears to be a bearish divergence forming in the 14-day RSI, and the momentum reading has fallen below 50. Most bearish traders would want to see a close below near-term support at the October 22nd low of 1317.40, with Gold bulls regaining the upper hand should prices close above the contract highs of 1432.50.
Mike Zarembski, Senior Commodity Analyst
