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Tuesday, January 22nd, 2019 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Options: Profit From Gold Regardless of Price Direction

Of all commodities markets, there is none more emotional than gold. And unlike most other commodities, every investor is an expert on gold prices. Everybody knows where prices are going. For these reasons, gold market analysis lends itself well to extremists. Back in November, when the Fed made official it’s plans for QE2, it was a mere certainty, according to many investors and pundits, that gold was going to $2,000 an ounce. Yet from the December highs to the January lows, Gold prices were down over $120 per ounce.

What gives?

It could be that the buildup to QE2 was more supportive to gold prices than the actual implementation itself – buy the rumor, sell the fact. It could be that a variety of international events (think European debt crisis, Egypt) have continued to bring “flight to quaility” buying to the US dollar, suppressing gold prices. It could be that that investor sentiment has begun favoring a US economic recovery theme – fueling speculation that the Fed will tighten the belt soon. It could be the general easing of fears surrounding financial markets in general. Most likely, it is a combination of all of the above.

Sure there is still the apocalypse camp that has gold pegged at $3,000 an ounce. And there is a the other side that has gold dropping to $500 an ounce. As I said earlier, this market lends itself well to extremism.

Our take is that gold is well situated now to potentially be one of the steadiest markets of 2011. Bernanke’s speech on February 3rd made very clear that quantitative easing was not about to be halted any time soon. This along with a renewed fear of inflation should continue to provide an underlying theme of support to gold prices in the short term.

And yet, recent rumblings by Fed members have suggested that “QE3” is becoming ever more unlikely. In addition, Chinas continued pattern of raising interest rates, the latest move earlier this month, should eventually begin to have an effect on spiraling growth. This could help check gold prices over the longer term.

We see a wide potential range for gold prices in for the first half of 2011 with $1500 as the upside and $1300 per ounce on the downside. We feel that a more subtle price pattern will be the defining change from the volatility seen in 2010 as economic factors driving gold prices have become more balanced. If this outlook holds true, gold is an ideal market for writing strangles in Q1 2011.

A strangle (also called a “bracket”) is a strategy that sells a put below the market and a call above the market. If the futures price of gold does not exceed the strike price of the call on the upside or fall beneath the strike of the put on the downside, both options expire worthless and the investor keeps a double premium.

While price volatility has settled somewhat, the investing public is still very active in the options. This keeps gold option premiums on both sides of the market plump.

Considering that one can now write strangles with strikes more than 40% above and below our projected ranges, investors can look to gold to collect some fat premiums this quarter – without having to pick market direction.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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