As the Fed prints billions of dollars each month from thin air, gold prices are affected by the rise in capital that flows into the equities market (and away from gold) as the Dow and other indices make record highs. The game is rigged, and like an exceptionally cruel game of musical chairs, whoever is still in the stock market when the music stops is going to suffer with the inevitable collapse.
Looking at the Daily Gold chart below, you can see gold futures have been moving sideways for the past month, with the upper end of the channel at 1315.7 back on 5/5/14 and the lower end of the channel at 1268.5 back on 4/24/14. One of 3 things is going to happen over the next few months: Prices will continue to move sideways in that channel, or they will break to the top side of the channel, or they will break to the bottom side of the channel. And there are at least 3 ways to make money in gold futures and gold options.
We could put in a buy order (go long) to purchase a gold futures contract if prices go above 1315.7 while simultaneously putting in a sell order (go short) to sell a gold futures contract if prices drop below 1268.5. Whichever way prices go, that order will be executed (and we would then cancel the other order) and we then take the long or short position of that executed order. Gold futures margins are expensive, so another way to straddle the channel is with options. We could purchase an out-of-the-money Call option now with a strike price above 1315.70 while simultaneously buying a Put option with a strike price below 1268.50. If prices go up, our Call option becomes valuable. If prices drop, our Put option becomes valuable. We would only lose the cost of one of those 2 options.
Another way to profit from this sideways channel is to SELL out-of-the-money put and call options and pocket the premiums (if we expect prices to continue snaking sideways, those options we sell will expire worthless, and we keep the premium paid to us for those options). The downside to this strategy is if prices move against us, all of those options we sold would then be ‘in-the-money’ and we would be exposed to losses.
A little patience, however, could go a long way. You can see in the Weekly Gold chart below that a wide 123 bottom has formed since reaching the multiyear low of 1182 (the #1 point in the chart). If prices break above the #2 point of 1391.4, we could go long Gold Futures with a target of the 50% Retracement Level of 1488.4.
If gold futures break to the upside of the sideways channel (above 1315.7) , we have a decision to make whether we want to wait for prices to also break thru the #2 before taking a long position, or to anticipate the ride up and buy a long position at that point.
When prices break out of sideways channels, they tend to travel the same distance up or down as they went sideways. Looking at the Daily chart, it looks like if prices break to the upside of the channel, they would continue to go up past the #2 point. The safest play would be to buy a Call option that is ‘out-of-the-money’ from the top of the channel, but ‘in-the-money’ in relation to the #2 point.
Either way, we have to wait and see if prices continue snaking sideways or break to the top or bottom of the channel before we initiate a position. Stay tuned!