Gold prices consolidated in a tight $60 range over the last three weeks. As I write, April futures are pushing up, just shy of $1600/ounce. Gold’s sideways move should be judged against a backdrop of the U.S. dollar, which has rallied 5% in the last six weeks. The fact that gold prices did not experience a further leg lower is supportive of a bullish gold view, in my eyes. I see the dollar going lower, and gold higher, in the near term. The U.S. Dollar Index is testing a key pivot point in the FX market (20-day MA). If this level fails to hold, the dollar could drop to its 50% Fibonacci retracement, taking March futures back down to 81.00. This move would stimulate the gold market, I’d expect.
At current levels, I have advised clients to scale into bullish trade.
Looking at the big picture, gold prices have corrected almost 15% over the last six months. This is not the end of the 12-year bull market, in my eyes, but rather a healthy correction in a long-term trending bull market. As long as prices remain above $1540/ounce, I remain friendly to gold and am advising bullish exposure. Futures have not been below $1,540 on a closing basis since July 2011.
Price penetration above $1620 (the April contract’s three-week highs) should lead to a trade back to $1,635 (50-day MA, light blue line). There are numerous ways to position yourself in bullish trade from current levels. I have three ideas:
1) I think traders could sell puts under the market.
2) Gain bullish exposure via the purchase of bull call spreads. (Note: Gold volatility is near a 7-year low, making option purchases more affordable).
3) Buy gold futures and sell out-of-the-money (OTM) calls, 1:1. (Note: With depressed volatility, option sellers won’t collect much premium. Don’t get greedy.)
Uncle Ben and his cronies get together for some tea at a FOMC meeting next week. I see little action being taken, but maybe the market will stop living in denial and accept that inflation is inevitably in our future. Historically, inflationary environments make metals a great store of value. I do not think this time will be any different.
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor’s needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.