Markets are flying high this morning ahead of today’s hotly anticipated Federal Reserve announcement. Chief among the leaders are gold, silver, and a handful of gold mining stock funds. The Market Vectors Gold Mining ETF (NYSEARCA:GDX) is popping 3.5%, while the triple leveraged Direxion Daily Junior Gold Miners Index Bull 3x Shares (NYSEARCA:JNUG) is up just shy of 9%.
Today’s rally in gold-related products is offering a reprieve to precious metal lovers tiring of the recent downturn. Higher rate fears have been taking their toll on the gold space. The SPDR Gold Trust (ETF) (NYSEARCA:GLD) and iShares Silver Trust (ETF) (NYSEARCA:SLV) were 4.4% and 7.3% off their summer highs, respectively, before today’s trading session.
Blame for the bout of profit taking in gold and friends lies in large part to the recent higher rates scare striking everything from bonds and real estate investment trusts (REITs) to utilities and consumer staples. Interestingly, while higher rates torch dividend payers, they also inflict pain on non-yielding assets like GLD and SLV.
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Theory aside, today’s upside reversal for all things gold is likely the marketplace betting that the Fed will once again kick the higher rate can down the road.
A GLD Trade Idea
With the specter of higher rates now fading in the distance, today seems as good a time as any to re-up bullish bets in the land of the yellow metal. Rather than go for the gusto with an aggressive GLD play, we’ll stick with a high-odds bet simply requiring the gold ETF to travel a bit higher in the month ahead.
Gold volatility remains subdued, suggesting a long call spread may be the way to go here.
Buy the GLD Oct $125 call and sell the Oct $128 call for a net debit of $1.50. Consider this a wager that the gold ETF rises above $128 by October expiration.
The max loss is limited to the initial debit paid at trade inception. The max gain is limited to the distance between strikes minus the net debit, or $1.50, and will be captured if GLD sits above $128 at expiration.
As of this writing, Tyler Craig owned bullish positions on GLD and SLV.
