Is the Bull Market in Gold Ending?
Friday, December 30, 2011
Gold prices appear at a crossroads, with the potential for an accelerated sell-off as weak longs continue to exit the market -- but also the potential for sharp gains should recent lows hold and bargain hunting buying emerge. This sets the stage for traders to explore strategies that would benefit from a big move or increased volatility in Gold prices, such as the purchase of an out-of-the-money strangle in Gold futures options. For example, with February Gold trading at 1547.00 as of this writing, the February Gold 1600 calls and the 1500 puts could be bought for a 31.50 debit, or $3,150 per strangle, not including commissions. The total investment in this strangle is the maximum potential risk on this trade. Given the high initial cost of this trade, some traders may wish to exit the trade prior to expiration in late January should the option premium fall to 50% of the initial cost of the trade or should the trade move to 130% of the amount of the initial investment.
Fundamentals
After reaching all-time high prices in 2011, Gold bulls certainly don't have much to show for the rally as 2011 comes to a close, as prices have fallen over $350 from their highs. Not only has Gold begun to lose some of its "safe-haven" luster, but several key technical indicators look to be pointing to even lower prices at the start of 2012. Lead-month Gold futures are now trading well below the 200-day moving average, which is an important technical signal, as many traders look at where prices are verses this long-term moving average to gauge if a market is in a bullish or bearish phase. In addition, the uptrend line drawn from the key October 2008 lows was broken on Thursday for the first time. A weekly close below this trendline could lead to a bout of accelerated long liquidation selling. Gold prices are not getting much help from a resurgent US Dollar, which is normally viewed as a bearish indicator for commodity prices. It appears that the assets that were being moved into Gold due to concerns about Europe and its handling of the debt situation have started to find a home in other venues, such as US and German Treasuries. This has taken some buying interest away from Gold, despite much lower prices than those seen earlier this year, as investors now appear more willing to earn even meager interest from owning government bonds than they do owning precious metals that not only pay no interest, but are also a cash drain, as both storage and insurance on metal holdings must be paid. There is heightened concern for investors now that Gold prices have failed to make new highs, and those buyers who were late to the party are now seeing heavy losses to the value of their metal holdings.
Technical Notes
Looking at the daily continuation chart for Gold futures, we notice Thursday's sell-off below previous support at 1532.70 was short-lived, as prices received by the close cut the daily losses in half. This could spark some near-term bargain hunting buying, as long as Thursday's lows continue to hold. This is backed by the 14-day RSI, which has moved into oversold territory with a current reading of 27.93. If we look at the Fibonacci retracement from the October 2008 lows, we notice prices have not even retraced to the 38.2% level! This could potentially lead to further losses, with the 50% retracement not coming into play until the 1300.00 area. The most recent Commitment of Traders report shows speculators shedding over 26,000 net-long positions during the week ending 12/20. This was before the most recent price declines, and we should expect to see further declines in the net-long speculative position in this afternoon's report. Below this past Thursday's low, the next support point is seen near the 1478.00 area, with near-term resistance found at the December 21st high of 1642.10.
Mike Zarembski, Senior Commodity Analyst
