The nascent recovery in gold prices lengthened its stride over the holiday weekend as buyers lifted the yellow metal to a fresh six-week high.
Those seeking a narrative for the price boost in the land of gold and the SPDR Gold Trust (ETF) (NYSEARCA:GLD) should look no further than Friday’s weaker-than-expected employment report.
The tepid number rippled across the financial pond bringing volatility to not just gold, but stocks, bonds, and currencies as well.
While stocks sunk and bonds soared, the U.S. dollar fell back a notch or two aiding ongoing recovery attempts in gold. Weakness in the greenback has accompanied the recent gold bounce every step of the way.
Let’s take a closer look at the GLD ETF to chronicle the ongoing resurrection and see if there’s a trade to be had.
3 Reasons to Be Bullish on GLD
At first I was skeptical of the bounce in the GLD ETF, but I’m slowly becoming a believer. Not because of any persuasive arguments emanating from the gold bug camp, mind you, but because of improving price action. In the end, price is the only variable that matters.
A brief survey of recent action in GLD reveals three bullish developments of note.
- First, the volume patterns have fully supported buyers of late. Since bottoming on March 17th, all the above average volume days have accompanied up days. The selling amid down days has been minimal.
- Second, the last drop in this gold ETF was bought up much quicker than any prior declines this year reflecting a noticeable change in the aggression of dip buyers. The formation of last week’s higher pivot low was the first step in reversing the short-term trend of GLD higher.
- Third, with today’s surge, GLD has now vaulted above resistance and its 50-day moving average.
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Now that the bulls possess a solid footing, spectators should be on the lookout for low-risk entries into GLD.
Profit From Continued Strength in GLD With Put Spreads
Having risen so fast in the past three trading days, GLD is perhaps a bit extended in the short run. A pullback in the coming days would provide a lower-risk entry than chasing today’s up gap.
Traders interested in profiting from continued neutral to bullish action in gold prices could sell May bull put spreads in GLD. Currently the May $112/$108 put spread can be sold for 42 cents credit, though the potential credit will increase if we see a retracement in gold prices in the coming days.
The max reward is limited to the 42-cent credit and will be captured provided GLD remains above $112 by expiration.
The max risk is limited to the distance between strikes minus the net credit, or $3.58, and will be lost if GLD falls below $108 by expiration. To limit the loss, however, consider exiting if GLD reaches the short call strike at $112.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
