Wednesday, February 1, 2012
Longer-term Gold bulls must be happy with the yellow metals resurgence of late, but the prospects for higher volatility remain -- especially with the technicals starting to show that Gold may be becoming overbought in the near-term. Some bullish traders who are looking for some staying power may perhaps wish to explore buying bull call spreads in Gold futures options. For example, with June Gold trading at 1737.70 as of this writing, the June 1800 calls could be bought and the June 1900 calls sold for a net debit of 25.00, or $2,500 per spread, not including commissions. The total investment in the call spread would be the maximum risk on the trade, with a potential profit of $10,000 minus the premium paid, which would be realized at option expiration in May should June Gold be trading above 1900.00.
Just like the Energizer rabbit, the bull market in Gold futures just keeps going and going, with prices posting their largest monthly gains since August of 2011. Among the reasons for Gold's renewed appeal was the weakening of the value of the U.S. Dollar, especially versus the Euro. A weaker U.S. Dollar makes Dollar-denominated commodities "cheaper" for non-Dollar holders, which increases the demand. This is demonstrated by the large purchases coming from China, despite their annual increase of domestic Gold production of 6% in 2011. The potential for a low interest rate environment in the U.S. may also be contributing to Gold's renewed investor interest, particularly after the Federal Reserve extended their outlook holding interest rates steady into late 2014. Since Gold offers no yield, investors are losing out on little income by holding Gold vs. interest bearing assets. Though Gold is currently trading nearly $200 below its all-time highs, prices have rebounded over 50% of the nearly $400 price decline seen in the last several months of 2011, when some traders were calling for the end of the Gold bull market. With few signs of Europe getting its act together to stem the sovereign debt crisis, Gold may once again assume its status as a viable alternative investment to both equities and government debt.
Looking at the daily continuation chart for Gold futures, we notice what appears to be a "bull flag" formation, with prices now breaking out to the upside. Prices are now solidly above both the 20 and 200-day moving averages and momentum as measured by the 14-day RSI is strong, with a current reading of 68.20. The only real negative is that the test of resistance near the 1750.00 level was initially successful, but failed to hold above this key level for long, which may be a sign that the rally may have become a bit overdone. Should prices close above 1750.00, the next resistance level is seen at 1800.00, with support found at the 200-day moving average near the 1644.00 level.
Mike Zarembski, Senior Commodity Analyst