While the debate continues as to whether or not the Fed will hike in its upcoming meeting in two weeks, gold is giving off vibes as if it expects one.
Yesterday was a risk-off session as far as equities were concerned, with the S&P 500 Index down nearly three percent. GLD, the SPDR Gold ETF, opened up 0.74 percent, but was sold off in the initial minutes. When it was all said and done, the metal closed up 0.35 percent.
A month ago, when GLD finally started to move – out of two-week sideways consolidation – it quickly rallied eight-plus percent in a month, peaking at $112.12. That peak came up more than two points short of two-year resistance at $114.50. Gold had – still does – plenty of oversold conditions to unwind, but was unable to go attack that resistance.
Medium- to long-term, the good thing, as far as gold bugs are concerned, is that the 200-day moving average is no longer dropping. It is flattish. In the near-term, however, GLD is struggling to take out $110, where resistance goes back 10 months (Chart 1).
If we are to go by how non-commercials are positioning themselves, it is only a matter of time before that resistance gives way. As Chart 2 shows, they have been adding to net longs in gold futures for a month now – up 46,268 contracts, to 70,733 as of last Tuesday. These traders have done a good job of divining price swings in gold.
But if the metal is not able to rally past that resistance because it is kept in check by rate-hike fears, the issue is not going to get resolved until the 16th-17th FOMC meeting. In this scenario, if August’s jobs report, due out this Friday, is strong – perceived or real – GLD probably comes under pressure.
Given this, it is probably not a bad idea for longs to either stay out of gold tactically or use options to earn some premium.
To recall, on July 7 July 17th 111 puts were hypothetically sold for $0.60. The short put got assigned. The effective cost of $110.40 was further reduced by three weekly covered calls – earning $2.17 – to $108.23.
September 4th 109 calls bring $0.94. It is a decent premium, considering that there are three sessions remaining in the week. In-the-money calls are used. If called away, this will ensure a profit of $1.71. Else, the effective cost drops further to $107.29.
Thanks for reading!
