Gold Looking Oversold
Gold has seen a dramatic decline along with other commodities over the past month, and I think it might be getting a bit oversold. Gold had dropped about 12 percent amid an eight-session losing streak. It finally managed to regain some lost ground Wednesday, August 13, as NYMEX December gold futures closed up $16.90 at $831.50 an ounce.
Most small speculators, which some call the “weak longs,” got washed out of the market amid the violent correction. The recent low for December was $808.60. But I think it might be time for a bounce, as demand for gold tends to increase into year-end and amid the holiday season. I recommend buying the 880/900 February 2009 options call spread, which gives you time for gold to recover. The options expire on January 27 and are relatively inexpensive, costing about $600 plus your commission charges.
Most people buy and hold options until expiration, but I recommend a slightly different approach. Buy two of these spreads, and take profits on one if the market rises to $880. If these options go in-the-money, the delta should double, along with their value. Take one contract off, and hold the remaining contract until expiration. If the market takes out the low mentioned at $808.60, exit both options positions. February gold futures were last trading at $830.
Some have attributed gold’s decline to the U.S. dollar’s rebound and reduced inflation expectations, but data this morning showed inflation remains a threat. The Labor Department reported the consumer price index climbed 0.8 percent in July, a 17-year high.
Feel free to call me with any questions you have about this strategy or others to suit your particular account size and risk tolerance. Ask about our special half-off commissions offer for new clients.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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