Gold's Price Drop Presents Opportunity
Gold prices fell hard to start this week falling to a five-week low at $1,650 an ounce. Analysts are contributing the drop to a coordinated attempt to avert a currency war among the Group of Seven nations (G-7). The G-7 is comprised of the United States, the UK, France, Germany, Italy, Canada and Japan. Also, light trading volumes in the Asian markets due to the Lunar New Year holiday also put pressure on precious metals. News reports suggested the G-7 officials continue to deliberate on the possibility of releasing a proclamation aimed at preventing a currency war. It was reported that a G-7 statement might be released ahead of the meeting of G-20 finance ministers and central bankers in Moscow this week. The proposed statement is said to focus a "commitment to market-determined exchange rates and avoiding policies to drive currencies." The statement's language implies that major economic powers would not indulge in unilateral currency devaluation. Given that commodities are priced in dollars, the outlook for the dollar is especially important to the price of gold. Generally, gold trades inversely to the direction of the greenback as moves in the dollar can influence the appeal of precious metals to holders of other currencies.
Technical selling drove gold lower after the price dropped below its 200-moving average of $1,665.10. Traders may be watching the $1,645 level as potential support of gold. If the price dips below this support level and doesn't immediately recover, it is reasonable to expect more losses in the days and possibly weeks ahead.
One way to take advantage of a possible further downward move in gold prices is a GLD ETF option trade. The SPDR Gold Shares (GLD) exchange traded fund seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.
GLD mirrors gold in that the price has traded range-bound since the end of last year. As discussed above, GLD is sitting on support and if it doesn't hold expect continued selling. A low risk strategy to bet on a drop in gold prices is to purchase put options on the GLD ETF. For example, a $159 strike price GLD put option that expires on March 16th would cost approx. $2.00 per share (based on yesterday's close). Depending on your stop-loss strategy, the most you could risk on this trade is the $2.00 per share purchase price, but the potential gain increases exponentially the further gold prices fall. With this type of' long put strategy you can decrease your cost by buying options that expire sooner (acquiring a further out expiration would cost more.)
By Gregory Clay