The Pause that Refreshes
Today's Idea 6-22-2011
A quick look at the chart for August Gold shows prices once again attempting to test resistance at 1555.00, which if taken out, could set-up a run at the all-time highs. Some traders who look for Gold prices to rally but who expect stiff resistance at the 1600 level may wish to explore ratio spreads in Gold futures options. For example, with August Gold trading at 1544.50 as of this writing, the August Gold 1560 calls could be bought and 2 August Gold 1600 calls sold for about a 3.00 debit, or $300 per spread, not including commissions. Ideally the August futures will settle at 1600.00 at option expiration in late July for the maximum potential profit on the trade. Since more options are being sold than have been bought, the potential risk is technically unlimited and traders should have an exit strategy in place in the event Gold prices move sharply higher. For example, traders may wish to exit the trade prior to expiration should August Gold trade above 1620.00.
Fundamentals
Gold futures have been rather quiet lately, with prices of the lead month August contract becoming range-bound the past few weeks. Is it a case of the summer doldrums hitting the precious metals market, or is the bull market getting a well-needed rest before its next move to test all-time highs? The global economic turmoil has not settled down, especially in Europe, as continued concerns over the Greek debt crisis, as well as that of Ireland, Portugal, Italy and Spain, continues to weigh on traders' minds. In addition, comments from Fitch ratings that it will be forced to put the U.S. on negative ratings watch should the debt ceiling not be raised by August 2nd should also add some support to Gold prices, as the Dollar is weakening on the news. Wednesday is also the end of the FOMC two-day meeting, and Gold bulls may be buoyed by any statement that would lead to speculation that the Fed will keep interest rates low for the foreseeable future and remain in an accommodative monetary stance. Speculative traders have been curtailing their net-long position in Gold futures, with the most recent Commitment of Traders report showing that the combined non-commercial and non-reportable long positions in Gold were cut by nearly 12,000 contracts as of June 14th. This reduction in the bullish sentiment for Gold leaves plenty of room for additional buying to emerge should the market break-out if its summer slump.
Technical Notes
Looking at the daily chart for August Gold, we notice an ascending triangle technical formation. This continuation pattern is considered resolved in the direction of the previous trend should we see a close above the upper line of the triangle currently at 1555.00. Momentum, as measured by the 14-day RSI has turned positive, with a current reading of 60.90. 1555.00 remains near-term resistance for August Gold, with near-term support found at the June 13th low of 1511.40.
Mike Zarembski, Senior Commodity Analyst
