Flight to safety buyers ignoring Gold?
Today's Idea
Although the short-term trend for Gold now seems to favor the bears, longer-term, any major price decline could spell a potential buying opportunity. Some traders looking for a short-term decline to buy Gold futures may wish to consider instead a diagonal spread in Gold futures options. A diagonal spread consists of a long and short position in an option of the same type but with different strike prices and different expiration months. For example, with June Gold trading at 1395.50 as of this writing, the May Gold 1370 puts could be bought and the June Gold 1345 puts sold for a credit of 1.10, or $110 per spread, not including commissions. Traders should consult the Trade and Probability Calculator on the optionsXpress website for a profit and loss graph for this trading strategy.
Fundamentals
Is Gold beginning to lose its luster as a "safe haven" investment? That is the question that many traders must be asking, as Gold futures have sold off sharply, despite the continued uncertainty surrounding Japan in the aftermath of the devastating earthquake and tsunami. Lead month April Gold fell below the 1400.00 level for the first time in 2 ½ weeks on Tuesday, as a wave of liquidation in the commodity markets in general appeared to spark a sell-off. Large speculators were holding a rather large long position in Gold, and requests for liquidity may have forced the liquidation of some of this position. In addition, concerns that the global economy might fall back into a recession due to the Japanese crisis are taking some of the inflation "worries" out to the market. Fundamentally, the outlook for Gold looks bullish, with Comex Gold stocks beginning to fall and expectations of a decline in Gold output in Australia, as heavy rains have caused flooding in some of the mining areas of the country. However, as many veteran traders know, the markets hate uncertainty, and until the situation in Japan starts to stabilize, we could continue to see a flow out of Gold and commodities generally, as investors attempt to improve their liquidity.
Technical Notes
Looking at the daily continuation chart for Gold, we notice that the sharp sell-off that occurred on Tuesday took prices back below both the 20-day moving average and psychological support at 1400.00. However, if we look longer-term, we notice that the bull market in Gold would not be challenged until we see a close below both the 200-day moving average, currently near the 1310.00 area, and the uptrend line drawn from the 52-week lows back in March of 2010. This uptrend line does not come into play until the 1290.00 area. After moving into overbought territory just a few sessions ago, the 14-day RSI has now fallen below 50, with a current reading of 46.64. The next major support point is seen at the 200-day moving average near the 1310.00 area, with resistance not found until the contract high of 1445.70.
Mike Zarembski, Senior Commodity Analyst
