Options Trade –SPDR Gold Trust (GLD)
Sunday, November 11, 2012

GLD Bounces Off 200-Day SMA!

**OPTION TRADE: Buy the GLD Mar 2013 175.000 call (GLD130316C00175000) at or under $3.75, good for the day. Place a protective stop limit at $1.50 and a pre-determined sell at $7.50.

by Ian Harvey

November 11, 2012

Introduction

With the presidential election now behind us, investors and traders alike will bring their attention outside of the political arena and back to the economic data front. While political ads and fervent opinions have largely dominated news mediums over the past few weeks, several major releases managed to slide under the radar amid all of the election jitters. More specifically, commodity prices across the board have faced growing headwinds. With resurfacing eurozone woes and ongoing improvements in the domestic labor market, coupled with a solid 2.0% GDP growth reading at home, the strengthening U.S. dollar has kept a lid on natural resources prices.

Despite all of the clouds of uncertainty looming over the U.S. and debt-burdened Europe, precious metals in particular appear to be taking cues from the positive economic developments instead, as showcased by their lackluster performance over the past month. Gold and silver prices have both endured steep corrections, although they appear to be holding above major support levels, thereby warranting a closer look from active traders.

As such, below is the recent price action for one of the most popular commodity ETFs, SPDR Gold Trust (GLD), along with key technical levels that will likely come into play over the coming weeks.

About GLD

SPDR® Gold Shares (GLD) offer investors an innovative, relatively cost efficient and secure way to access the gold market. Originally listed on the New York Stock Exchange in November of 2004, and traded on NYSE Arca since December 13, 2007, SPDR® Gold Shares is the largest physically backed gold exchange traded fund (ETF) in the world.

SPDR Gold Trust (the Trust) is an investment trust. The Trust holds gold and issues shares (Shares) (in minimum blocks of 100,000 Shares, also referred to as Baskets) in exchange for deposits of gold and distributes gold in connection with redemption of Baskets. The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion. The shares are designed to provide investors with a way to invest in gold. The Shares represent units of fractional undivided beneficial interest in and ownership of the Trust.

Why the Movement

The so called fiscal cliff will not be met head on, the approach will be one of extending some of the tax cuts now in place and a watered down strategy of fiscal prudence. Budget ceilings will come and go and the deficit will grow ever larger as the economic recovery will be considered far too fragile for any serious attempts at financial reform. All in all nothing has really changed, the slow motion train crash will continue and the fallout will affect everyone.

One of the casualties will be the dollar as quantitative easing will be applied in ever increasing doses, devaluing the dollars’ worth and its buying power. However the race to the bottom is alive and well as other nations will adopt similar strategies in an attempt to remain competitive.

The demise of the dollar and other fiat currencies brings with it an increase in the price of hard assets. Over the last decade or so the hard asset of choice has been the precious metals sector, mainly physical gold and silver and they have served us well.

My opinion is that gold and silver will rally from this point through to the early part of next year making now a good time to accumulate more of the physical metals. Once above the $1800.00/oz level gold will be well positioned to make a run at a new all-time high. I also expect silver prices to catch the wind and move to much higher ground. The gold to silver ratio currently stands at 54, if this ratio were to contract, as I suspect it will, then silver prices could well and truly explode, just as it has done in the past. We are already well positioned with our SLW options.

Therefore, by using an alternative such as GLD, instead of spending a great deal of capital on actual physical metal, we are able to leverage profit much more comfortably!

Technical Outlook

As can be observed in the chart below, after dropping 3% in October, shares of GLD finally appear to be regaining their footing at a level where it counts big-time; this ETF has managed to bounce off its 200-day moving average, perhaps suggesting that the bulls were simply waiting for a healthy pullback before jumping back in.

However, what’s concerning is the fact that GLD has previously staged “false reversals” after failing to summit the infamous $175 level as seen back in November of 2011, late February of 2012, and most recently, in early October.

In terms of upside, this ETF has a clear path until it nears $170 a share, while major resistance lies at the $175 level. In terms of downside, immediate support comes in at around $162 a share, followed by the $160 level.

Conclusion

For those bullish on gold, the recent pullback presents itself as an attractive opportunity to jump into this trade; however, I advise more conservative investors to observe how GLD behaves as it nears historical resistance levels once again before pulling the trigger!

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the GLD Mar 2013 175.000 call (GLD130316C00175000) at or under $3.75, good for the day. Place a protective stop limit at $1.50 and a pre-determined sell at $7.50.



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Options traders win because they are successful.



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