Metals: After starting the week on a dip, Gold futures managed to muscle their way back above $1,200. The weekly close of $1,189.70 was offside by 40 cents week-over-week. It is this kind of action that I was referring to when I penned the following last week, “economic uncertainties coupled with the eventual inflationary pressure may re-inspire some safe haven buyers and buoy the yellow metal near longer-term support (100 and 200 DMAs). Technically, the bulls will want to see gold’s price trade north of $1,225 to gain momentum. Otherwise, gold seems temporarily dull which may explain the recent contractions in implied volatility as the metal trades in a range.” I must admit, the early week lows that eventually bounced off of the 100 DMA had me nervous and were anything but dull!
The chart below shows Gold’s volatility over the last 4 years. Implied volatility (the blue line), which is presently resting close to 20%, is approaching a 3-year low. While past performance is not necessarily indicative of future results, looking back at the 2007-08 period, IV rose steadily when gold’s price pushed to all time highs as a safe-haven from the equity markets’ turbulence. IV experienced its sharpest move up after gold’s price set a lower high on its second challenge of the much anticipated $1,000 price point. Some will argue that the cause for the IV spike was based on fears that gold’s move up was done. In my opinion, the price spike in IV was based on gold’s possible move higher. Sure, I can say that now with the benefit of hindsight, but at the time the financial markets’ very existences were in question and fiat currencies seemed unreliable. Now that gold is testing the long-term trend line support, IV is attempting to perk up again. Are option traders looking for protection against a break down in price or are they indicating that another move higher may be on the horizon? I wish I knew with certainty. Even though the 20 and 50 DMA have recently had a bearish crossover, which could lead to a breach of support, I am still leaning towards the latter. The MACD and Stochastics have reached oversold levels and may soon give a buy signal. Concerned longs may consider adjusting exposure to below the 200 DMA. Either way, it is advisable to watch price action (bullish or bearish) as IV attempts to crack the 25% level, it has been a formidable challenge throughout 2010. Stay tuned.
Chart by OptionsVue Systems International
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