Not So “Golden” Anymore?

Gold bulls cannot be too happy with the way the “yellow metal” has acted the past few weeks, with the most active August contract slumping to two-month lows yesterday. I guess the old saying “misery loves company” kind of applies here, as the entire commodity complex has slumped of late — especially the energies and the grains. Traders’ glasses have apparently become half empty, as talk of renewed deflationary concerns has crept back into the spotlight on signs that the speed of any economic recovery has slowed. In addition, traders fear that physical Gold demand out of India, the world’s largest Gold consumer, will decline after the Indian government doubled the import taxes on both Gold and Silver this week.

This tax on top of relatively high precious metals prices could really hurt demand going forward, which could lower the support point in the cash market. Speculative accounts are still heavily long Gold futures here in the U.S., but there have been some signs of long liquidation — especially by large non-commercial accounts. The most recent Commitment of Traders report shows large non-commercial traders holding 169-735 net long Gold contracts as of June 30th, down 1221 contracts from the previous week. Ironically, small speculators increased their net long position by 5,576 contracts the same week, which may signal potential long liquidation by these “weak” heads should major psychological support at $900.00 give way. If there is a bright spot for Gold bulls, it might be renewed buying by nervous investors if the current stock market sell-off gains momentum, but even that may be short-lived if margin calls from other markets force traders to liquidate their Gold positions to meet these demands.

Trading Ideas

Gold futures seem to be at a critical point, with the potential for further long liquidation if support fails or new buying by flight to quality investors on any signs of a stock market correction. Some traders who believe Gold prices will become more volatile during the next several weeks may wish to look into purchasing Gold option strangles. A long strangle position consists of buying an out of the money call and an out of the money put at different strike prices in the same contract month. An example of this trade using options on Gold futures would be buying the December 930 calls and the December 880 puts. With December Gold trading at 908.00 as of this writing, the strangle could be bought for about 82.00, or $8,200 per strangle. Given the high initial cost of this trade, some traders may not necessarily wish to hold the trade to expiration in November, but potentially consider exiting the trade if Gold makes a large move, if volatility increases quickly, or if Gold prices stall in the next few weeks.

Technicals

Looking at the daily chart for August Gold, we notice the uptrend line formed from the April lows was violated in late June, and this line has acted as strong resistance for any rallies since that time. Prices are now below both the 20 and 100-day moving averages, which puts both short and long-term bears in control. The 14-day RSI is weak, but has not yet moved into oversold territory, as the current reading is still over 30. Other than psychological support at 900.00, the next support point appears at 882.00, with resistance seen at the 110-day moving average, currently near the 930.50 area.

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