Are Bulls Losing Their "Golden" Touch?
Friday, September 16, 2011
With Gold prices possibility setting up for a much needed major correction in prices, some traders with a bearish bent may wish to explore the purchase of a bear put spread in Gold futures options. For example, with October Gold trading at 1780.70 as of this writing, the October 1780 puts could be bought and the October 1750 puts sold for 13.00, or $1300.00, not including commissions. The risk on this trade would be the entire amount of the investment in the spread, which has a potential profit of $3,000 minus the premium paid which would be realized at option expiration in late September should the October futures be trading below $1750.00.
Fundamentals
September is proving to be a rough month for Gold bulls, as prices are trading near 3-week lows despite continued uncertainty regarding the European debt situation. The most recent sell-off in Gold prices seems to be tied to a move by several Central Banks, including the Federal Reserve, to help alleviate Dollar liquidity concerns by providing 3-month Dollar loans to many leading European banks that were having difficulty finding US Dollar funding due to concerns about their distressed sovereign debt holdings. This news is taking away some of the immediate concerns of a global credit crunch, similar to what was seen following the demise of Lehman Brothers. Gold traders also note that technically, Gold prices have started to look weak, failing to make new highs, which may be scaring some weak longs from the market and preventing short-term momentum traders from adding to long positions on market strength. Though the short-term trend has turned lower, longer-term there is still optimism for higher Gold prices, including an annual Gold price forecast from HSBC, which has raised its price outlook for Gold in 2012 to $2,025 per ounce, which they have upped 25% from their previous price forecast, citing heightened macroeconomic concerns and few so called "safe haven" investment options. Speculators continue to hold a large net-long position in Gold, with the most recent Commitment of Traders report showing large and small speculators holding a net-long position of over 285,000 contracts as of September 6th. However, many analysts expect to see a rather significant decline in this long position in the next report, as long liquidation selling should have been a heavy part of the recent price declines. Going forward, bulls will likely need to see some signs that the recent price sell-off is near an end, especially as some key technical price levels are coming into play. If fresh buying is not found soon, chart conditions may be signaling a rather significant price decline may be on the horizon.
Technical Notes
Looking at the daily chart for December Gold, we are seeing the formation of some interesting but conflicting chart patterns. First, we have what appears to be a double-top formation, as the market made a new high on September 6th, taking out the old highs from August 23rd by a few dollars before selling off the past several sessions. Prices are also testing the uptrend line drawn from the major low of 1481.00 made on July 1st, which was the lowest level Gold reached since the latest leg of the bull run. Prices are now solidly below the 20-day moving average, which is triggering some short-term momentum selling. There is a bearish divergence in the 14-day RSI, and the index has fallen below the 50 level for the first time since July. Gold bulls will counter that the recent price decline was on diminished trading volume, which may signal the sell-off was more long liquidation and not new short positions being established. Also, the recent sell-off in prices has some resemblance to a "bull flag" formation, which would normally be considered a "consolidation" pattern in a bull market. The next major support level for December Gold is seen at the August 25th low of 1705.40, with resistance found at the contract high of 1923.70
Mike Zarembski, Senior Commodity Analyst
