It has been a wild month for gold. As concerns over how the coronavirus may impact the U.S. economy have caused the yield on U.S. Treasurys to slide lower and lower, the price of gold soared higher and higher. In fact, gold rose above $2,000 per ounce for the first time in history on July 28.
Because of this — and a few other factors moving the price of precious metals — we think now is a fantastic time to jump into a conservatively bullish position on the SPDR Gold Shares ETF (NYSEARCA:GLD).
Record-Low Yields are Good for Gold
The sustained, record-low yields on long-term Treasurys have forced investors to look for a better return on their money.
During times of economic stability — when the world’s central banks aren’t pushing long-term yields lower by dropping short-term interest rates to zero and buying trillions of dollars’ worth of bonds and other assets — gold doesn’t look attractive because, unlike Treasurys, it is a non-yielding asset.
After all, gold doesn’t pay a dividend or a coupon rate. During times of economic instability, however, when real yields are negative (meaning the rate of inflation is higher than the yield you can get by buying an asset), gold becomes a lot more attractive.
The bullish run the precious metal had been enjoying abruptly changed last week, however, when gold prices gapped lower on Tuesday after Russia announced it had achieved a breakthrough in developing a vaccine for COVID-19.
Daily Chart of SPDR Gold Shares (GLD) — Chart Source: TradingView
The vaccine news caused Treasury yields to jump higher on the hopes that a vaccine could speed up the global economic recovery, which lowered interest in buying gold as portfolio protection.
That gap lower gives traders the perfect chance to sell a put write.
Profit from the Premature Selloff
While we too are hoping for a speedy recovery, we think the selloff in gold is premature. The Russian vaccine announcement seems a little too good to be true, and we’re still dealing with uncertainty here in the United States.
Congress is no closer to finding a compromise than it was a week ago when its members weren’t on summer recess, the President’s executive orders seem to have generated more questions than answers and consumers are waiting to see what’s going to happen to coronavirus infection rates as the country heads back to school during the next few weeks.
The recent pullback in gold prices has boosted the value of the put options on GLD, which makes now an excellent opportunity to generate some income by selling a put write against the fund.
In the chart above, you can see that GLD formed support at around $180, so a strike price set around that level would be a less risky way to play gold with a put write.
While we aren’t looking for GLD to rocket back up to its previous highs, we do anticipate it will continue to consolidate above this support level during the coming month as Treasury yields drift back lower.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.