Just like the Crude Oil futures market we discussed in a recent edition of XPRESSO, February Gold seems to have solid chart support at the recent lows near the 1360.00 area. Some traders who are expecting these lows to hold in the near-term may wish to sell Gold puts with a strike price below chart support. For example, with February Gold trading at 1419.20 as of this writing, the February Gold 1340 puts could be sold for about 3.80 points, or $380 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in late January should February Gold be trading above 1340.00. Given the potential risk involved in selling naked options, some traders may wish to buy back the short puts before expiration should February Gold close below support at 1361.60.
Traders were certainly "going for the Gold" in 2010, as prices of the "yellow metal" rose over $300 per ounce last year. It appears that Gold's emergence as an "alternative" currency, which many traders now embrace, has been among the key catalysts in Gold's run to new historic highs. Worries about inflation, especially in the era of "quantitative easing", has also put a bid into Gold prices, with many investors buying Gold as a hedge against rising inflation. Although high Gold prices hav curtailed physical buying by jewelry manufactures, especially in India, the market appears to be looking past this and focusing on the potential for increased Central Bank buying, particularly by Chinese and Russian banks, as these countries look to further diversify their currency surplus holdings. Though Gold prices have had quite the run-up this past year, the market may still find continued support, especially if the forex markets remain volatile in the upcoming year.
Looking at the daily chart for February Gold, we notice how volatile trading has been since October of 2010, as prices zigzagged to new all-time highs. Prices have traded on both sides of the 20-day moving average during that time, leading to choppy trading activity. Though the bull market appears to be well intact, there is a bearish divergence in the 14-day RSI. Support for February Gold is seen at 1361.60, with resistance found at the contract high of 1432.50.
Mike Zarembski, Senior Commodity Analyst