How To Position Your Portfolio For A Gold Rally

| About: SPDR Gold (GLD)

As traders await FOMC rate decisions later today, they may notice that the SPDR Gold Shares (NYSEARCA:GLD) ETF has had a bit of a correction recently, falling below the simple 50-day moving average. Reports this morning suggest that the Federal Reserve will continue their Dovish stance with respect to monetary policy. This will lead some to believe that inflation is inevitable and some investors will naturally flock to Gold.

There are lots of indications that the Fed will continue to pump money into the economy. Most people believe that the Fed will continue their loose monetary policy until the unemployment rate drops significantly. Last month, the rate dropped slightly to 7.8%, but at the recent conference in Jackson Hole, Bernanke said, "the economic situation is obviously far from satisfactory. The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value, and other indicators--such as the labor force participation rate and the number of people working part time for economic reasons--confirm that labor force utilization remains at very low levels." This indicates that the Federal Reserve will continue current policies until unemployment is in the 5% to 6% range.

Gold speculators may want to look at the January 2013 expiration deep in-the-money call options as a way to leverage their buying power into this ETF that currently trades at about $165 a share. Buying a call with a $120 strike price with an ask price of $45.75 is actually quite cheap. The time value of the option is negligible. This means you can effectively leverage your exposure to Gold at very little cost.

If the index rises above $170, this position will gain about $5 in profits on $45.75 invested. This represents a return of 10.9%. Buying the index outright, you would only receive a profit of 3% on the same price movement.

Keep in mind that buying this deep in-the-money call could backfire on you if the recent Gold down-swing continues. Since the position is levered, the losses will also be significantly higher as well. For added protection, add an out-of-the-money put option as a downside hedge.

The trade described above is hypothetical and should be considered as an educational resource only. Do your own due diligence before investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.