Has Gold Finally Broken Out?

By Brad Zigler

Wednesday's rally was intrinsic to gold and not really fueled by outside influences. Interbank crosses against the greenback, for instance, were fairly flat Wednesday.

COMEX/NYMEX Gold (Dec. '09)

You might remember that "coiled spring" business illustrated in "Good Times For Gold Traders" a few days ago. The article examined a long strangle on December gold employing a $1,000-struck call and a $900-struck put. The cost of the strangle was $42 an ounce on August 26. Yesterday, the options changed hands at a combined premium of $47.10, for a 12.9% gain.

Keep in mind that the combination isn't anywhere near its expiration breakeven points of $1,042 or $858. The call's premium inflation is entirely due to ballooning market volatility.

At this point, if you were confident of the breakout's strength, you might sell the put to salvage the remainder of its premium. At current prices, that would leave you long a naked call with an expiration breakeven of $1,029.30. If the technical objective of $1,150 is attained by the call's expiration on Dec. 28, a gain of at least $12,070 or 412% could be garnered.

There are plenty of technical reasons to be confident of the upside move. The MACD indicator's turned bullish, as has RSI. If the December contract stays north of $982.80 on closing basis, bulls will be eyeing the June reaction high of $993.60 as their next near-term target.

If the gold market fizzles from here, though, gold stranglers risk their $2,930 net investment. Near-term support can be expected at $972 and $964 for the December contract.

*Note: To provide a longer-term perspective, we've pushed back the base for our real-time monetary inflation indicator to May 2006. The base previously was January 2008. The indicator represents the average annual rate of monetary inflation over the period. The current 12-month inflation rate is 0.3%.

Comments

[buybigtires:]

The more governments stockpile(China), and insurance companies hedge with gold (NW Mutual), then the stronger the move.

That excludes the stock market crash that is coming on shortly. It's time to get on the train, and ride gold to the top.

Sep 04 08:56 AM

[John Mylant:]

Excellent article to follow

Sep 04 09:31 AM

[hatarakiman:]

I just heard from the news in Taiwan. The manager of the jewelry store said the price of the gold is so high, but the sales is aweful. Few people are willing to buy it as a present.
So people just buy it and put it into the closet, but not really use it for any purpose... It's really a good sign.

Sep 04 10:35 AM

[justin_3d:]

Yeah I see that Gold has usually been the leader in commodities. Before oil peak, Gold had already peak. And now that gold is starting it's upward climb, will oil follow?
Hmm will be interesting to note that correlation!

Sep 04 10:39 AM

[Graham and ...:]

People want to buy gold, but not "sell" it by giving it away as a present. This is called hoarding.

Sep 04 10:45 AM

[Nidhi Kadalbal:]

Is it just seasonality or is there something more to drive the gold up? Though the technical indicators are pointing a breakout, there are bearish influences on gold too - like India's gold import falling .. and dollar index is finding support at 78.

www.thepreparedinvesto...

Sep 04 12:16 PM

[AndrewBaker:]

Gold will go over $1000, and when it does, with maybe some consolidation first to form a base, it will keep going. There's not much out there right now that you can trust any better.

Sep 04 01:58 PM

[Safely Buy ...:]

Without the dollar falling, IMO, the gold price rise is more traders doing what they do best. Banks are still failing but that doesn't seem to be a huge factor on the dollar at present. Treasuries are holding steady. Stock market isn't collapsing. CPI is falling (yes I realize this isn't an indicator of inflation). And as you point out, the dollar index is holding steady in the 78 range. Until that breaks down, I'd view the current rise as just the boys playing with the yellow metal.

I always keep in mind that gold "should" be priced higher based on all that has transpired and especially with increasing current deficit projections (let alone Fannie, Freddie, ING etc. needing more than expected).

Of course I believe in the medium term dollar decline pattern to continue and gold pattern to end with its 9th straight calendar year rise in price, but this current run is rather suspicious.

The dollar index breaking below 72 will be the tipping point.

On Sep 04 12:16 PM Nidhi Kadalbal wrote:

> Is it just seasonality or is there something more to drive the gold
> up? Though the technical indicators are pointing a breakout, there
> are bearish influences on gold too - like India's gold import falling
> .. and dollar index is finding support at 78.
>
> www.thepreparedinvesto...

Sep 04 02:23 PM

[HardwoodFlo...:]

What the traders are watching now is teh volume to see if there is enough small contract interest to warrant higher prices. If there is enough then prices will break out- if not then this move will level out. There is no reason why $1,500 spot price isn't tennable if it breaks out. If it can't get out of this range somebody is going to lean on it.

Now to the charts...

Sep 04 02:38 PM

[LR European:]

...or, more frequently, "investing".


On Sep 04 10:45 AM Graham and Dodd Investor wrote:

> People want to buy gold, but not "sell" it by giving it away as a
> present. This is called hoarding.

Sep 04 02:39 PM

[Hephasteus:]

Gold is manipulated by the spread. It has to occaisonally break out. It breaks big EVERY time. Then is quickly chained and drawn back down. It eventually trades in too narrow of a range and takes too much volume to manipulate so it has to break out again. rinse and repeat.

Sep 05 02:49 AM

[aarc:]

Where are gold bugs of yester-months? They were harping gold to the heavens before the massive March equity rallies. It would go to 2,000, 5000, and then 10,000?

Dampened by the stock market rallies and the triangle that formed in the daily chart of gold. Naturally.

Technically speaking: GLD or the ETF for gold has a target of 101 to 110 based on the triangle that formed on the daily chart. That corresponds to 1066 to 1145 for YG or the gold futures.

Major resistance is at 1130 for YG.

I expect gold to return back to the apex of the triangle at around 955 once the thrust out of the triangle has completed or blunted by the 1130 resistance.

Then a final meltdown (pun intended) to 559 is the highest probability scenario for now.

That is the time to buy gold for long-term hold. When the majority of players got badly burned after losing so much money speculating and chasing the gold rallies.

See you at 1130. And then perhaps in another 6 to 8 months; gold will be back to 559. Then we can buy a lot for long-term hold. It won't be long now.

Sep 05 05:37 AM