Gold Goes Parabolic on Safe Haven Buying
Wednesday, August 10, 2011
Some traders who wish to be long Gold for the long-term but who fear a potential correction might be overdue may wish to consider exploring a put ratio spread. For example, with December Gold trading at 1750.00 as of this writing, a December Gold 1680 put could be bought and 2 December Gold 1590 puts sold. Ideally, you would want to initiate a ratio spread at a net-credit which would allow for a profit even if the market moved sharply higher at expiration. Traders should be aware of the risks involved in selling more options than the number of options purchased, and this trade is perhaps better-suited for those looking to get long Gold should the market decline to the strike price of the short puts.
Fundamentals
Gold has certainly been shining bright lately, as prices have moved parabolic, with the most active December Gold futures trading as high as 1782.50 in Tuesday's trade. However, as we write, the equity markets are trading sharply higher, and Gold futures have shed nearly $50.00 off the day's highs, as technically the market appears to be overbought. The sell-off in the global equity markets tied to the rather controversial downgrade of US credit by Standard and Poors (S&P) may have triggered buying of equities by bargain hunters, which may be causing some shifting of funds from Gold and into other investments. In addition, Gold has rallied sharply vs. the more industrial precious metals such as Platinum, sending the Platinum/Gold ratio to a Platinum discount, which in the past was an unsustainable event, as Platinum has traditionally sold at a premium to Gold. Although Gold prices may appear poised for a rather substantial correction, analysts at some of the major investment banks are still calling for higher Gold prices by the end of the year. Ultimately, the rally in Gold is a statement of investors' lack of confidence in the fiscal policies of the major world economies, which have caused investors to move funds out of currencies and sovereign debt and into Gold as a safe haven asset. Until we start to see some signs of a cohesive plan to deal with the mounting debit of western nations and a softening of inflation in China and other Asian economies, it is too early to say that Gold's bullish run is near an end.
Technical Notes
Looking at the daily chart for December Gold, we notice what appears to be a bearish "shooting star" pattern on the Japanese candlestick charts. This pattern can be a sign of a price reversal in an up-trending market. The recent parabolic move in prices increases the chance for a major price correction. The 14-day RSI is vastly overbought, with a current reading of 82.70. Tuesday's high of 1782.50 will now act as resistance in December Gold, with the next support point seen at the 20-day moving average currently near 1631.00.
Mike Zarembski, Senior Commodity Analyst
