SPDR Gold Trust (ETF) (GLD) is approaching a long-term critical support area at $115, a level I think will hold. I look for gold to bounce sharply off this level over the coming weeks.
As the chart shows, $115 has been a crucial level over the past three years, with GLD bouncing several times before ultimately succumbing a year ago and breaking support. The recent rally in GLD broke past the $115 area before retesting that level on April 7, with a sharp subsequent move higher.
Gold is also getting oversold on a nine-day RSI basis, with previous instances of readings below 30 equating to significant local lows in the price of GLD. Given the latest reading of 27.51 (below the oversold level of 30), I expect shares to head higher in a similar fashion to the previous instances.
So from a technical perspective, gold looks oversold at near a major support level, usually good fodder for a sharp spike higher.
Fundamentally, gold is inversely correlated to the strength of the U.S. dollar, with a strong dollar being bearish for gold, as indicated in the chart below. The recent rally in U.S. dollar ran into some trouble yesterday, following another round of currency weakening out of China, putting the dollar/yuan at multiyear lows.
While the Federal Reserve will continue to jawbone a hawkish rate environment, it will be very difficult for the Fed to raise rates with the rest of the world still in an easing/weakening mentality. This bodes well for the start of a period of dollar weakness, a definite tailwind for gold prices.
Unlike stocks, high levels of complacency in commodity-based options tends to signify a bottom, not a top. Certainly implied volatility (IV) is pointing to complete indifference, with IV in GLD at only the 16% percentile.
This low level of angst also portends for a bounce in gold.
Low levels of IV also mean option prices are comparatively cheap, favoring long option trade structures. To position for a bounce in GLD, a straightforward long call play makes the most probabilistic sense.
GLD ETF Trade
Buy the GLD June $115 calls at $3. These are the options that expire on June 17.
At less than a 15% IV level, these call options are incredibly cheap. On April 6, with GLD at almost the exact same price ($116.94 then versus $116.98 today), the $115 call with a similar 23 days until expiration carried over a 16% IV.
More aggressive traders may want to consider using Direxion Shares Exchange Traded Fund Trust (NUGT), a three-times levered gold based ETF, to enhance return (at the expense of heightening risk).
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
