Gold Maintains Its Luster: Here’s Some Trading Ideas

Fundamentals

Gold futures continue to push higher on a weaker Dollar and demand as an alternative investment. The recent surge in the Dow over the 10,000 mark has hurt the greenback, as investors are choosing riskier assets instead of the Dollar and treasuries. The surge in equity prices also gives Gold a boost as an alternative investment. Stock market valuations are extremely high compared to actual growth projections, suggesting the market may be ripe for a sharp move once it does correct. It is impossible to pick tops in equity prices, so weary traders seem to be positioning themselves in Gold rather than bonds. Central bank policy in the West continues to favor stimulating growth rather than taming inflation, making precious metals all the more appealing. Meanwhile, China and Russia seem to be stockpiling Gold, bolstering the physical market. While physical buying by investors and governments had been very stout, jewelry demand around the globe remains weak — most notably in India, where high prices may result in disappointing wedding season results. Likewise, industrial and dental demand has been well short of what the Gold market is accustomed to seeing. If anything, the lack of Gold demand outside of investment may be the Achilles heel for prices. The upcoming Christmas shopping season may offer traders further clues as to how strong physical demand will be going forward.

Trading Ideas

Both the fundamentals and technicals seem to possibly favor the long side for Gold. However, the markets may be in corrective mode, given the sharp rise in equities and drop in the Dollar. For this reason, some Gold traders may perhaps wish to bide their time and wait for an entry point if trading futures or possibly enter into an option position. Traders wishing to be long the market may want to consider entering into a bull call spread, buying the December Gold 1075 call (GCZ91075C) and selling the December 1100 call (GCZ91100C) for a debit of 8.00, or $800. The spread risks the initial investment for a potential profit of 17.00, or $1700, if the December futures contract closes above 1100.00 at expiration.

Technicals

The December Gold chart shows prices consolidating after the recent breakout. Given the overbought conditions on the RSI indicator, it would not be surprising to see prices come down to test newly established support near the 1025.00 level. If the market does not break below the 1050 mark, prices may test the 1125.00 level. Momentum seems to be flattening out, suggesting prices may consolidate further before finding a short-term direction.

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