I always have found gold and other precious metals attractive. When I was younger, my grandfather was an avid coin collector and because of him I have always had an interest for gold and silver. I enjoy going out to auctions and garage sales and snapping up the chance to buy gold and silver coins; or jewelry for cheap prices. For now, collecting gold and silver is a hobby that hopefully I can pass down to my children. I hope it can be a collection that can grow in value over time.
The allure of gold is something that I have always been attracted to, but when trading gold in paper terms I don't find gold sexy in the short-term. One way to play gold is through the SPDR Gold Shares ETF GLD. The GLD seeks to reflect the performance of the price of gold bullion and the GLD is one of the closest ways to invest into gold without physically owning it.
Since the beginning of 2012, the GLD rocket ship took off higher along with the rest of the market on the backs of quantitative easing, but The GLD has been on a downward trend since February 29, 2012. The GLD fell over $8 per share and this big drop may have been an overreaction. But since that drop, the GLD has been down about 8% and making a series of higher lows. Quantitative easing has been the GLD's best friend, but with the Federal Reserve Open Market Committee not giving a clear sign that the third round of quantitative is coming; gold just isn't sexy in the short-term.
In the long-term I'm bullish on gold. But with anticipation of QE3 not happening, a stronger U.S. dollar and strengthening economies, this can in the short-term continue to derail the GLD train. When looking at a one year chart of the GLD, investors will notice that the GLD hasn't been able to break through its previous highs. From late August 2011 to September 2011 the GLD was around $180 then dropped, but made a nice run higher in late October. Since October 2011, the $171 level has acted as resistance. With GLD's current price, investors might anticipate a bounce higher. However, without a catalyst in place for the GLD, it's possible that the GLD could re-test the $153 level. The GLD hasn't seen this level since late December 2011/early January 2012. If investors believe that the GLD has more downside, here is a bearish option play for the GLD.
Trade: Buy May $158/$153 vertical put spread
Gold can be volatile at times and by doing a directional spread, investors can limit their risk and reduce their break even point then just outright buying a put.
Cost of trade= (Buy May $158 put = 3.30 or 3.30 x 100 = $330)
(Sell May $153 put = 1.51 or 1.51 x 100 = $151)
$330 - $151 = $179 per spread
Breakeven = ( $158 - 1.79 = $156.21)
Max Profit= (distance between 158/153 is 5, so 5 - cost of spread 179 = $321)
With the GLD currently below its 50, 100 and 200 day moving averages, this trade is a technical-based trade. There could be rumors that the quantitative easing bandwagon might happen and this will most likely drive up gold and silver. If this happens, I would still be bearish on gold until actual confirmation of additional quantitative easing. With quantitative easing coming to an end (for now), gold will have to find another catalyst to climb higher. Gold may be the ultimate safe haven asset, but in the short-term I believe the GLD will drift lower. If this trade doesn't appeal to you, I would be cautious on the GLD and wait for the $150 level before possibly making a bullish move. Thanks for reading and good luck.
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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