Countdown to Gold's $1300 Assault

We remain convinced that gold has yet to make its high for the year, and expect an assault on $1300 to begin in about a month from now.

Despite our bullishness, we are not convinced that buying more call options on gold is the right move for now, since we expect action to the upside to be fairly limited over the next few weeks. Our reasoning for this is partially due to the fact this is a seasonally weak time of year for gold, but also since we saw heavy selling in 'out of the money' gold call options and futures this week, whenever the yellow metal showed some strength.

This indicates that there could be a lot of trapped speculative longs that will be looking to exit their positions as soon as the price turns just slightly in their favour, creating a dampening effect on the price.

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We are looking for gold to close above $1225 to signal that this major rally to a new all time high is beginning. We previously saw support for gold at $1185, however it now appears that the precise support level is slightly lower than that, since gold has closed under $1185 and yet did not drop further, perhaps being supported by the blue line marked on the chart above.

If gold were to break down, there is major support at $1140 and on the 200 day moving average. During this bull market, gold has only remained below its 200dma for a prolonged period of time once, and that was during the financial crisis of 2008 whilst massive deleveraging was taking place and nearly everything was being sold off in favour of cash.

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So given that in the short term we see limited upside and the short term downside being $1140, with higher prices expected later this year, our trading strategy would be as follows.

For those using unleveraged vehicles such as GLD we would simply say wait it out, however if you were looking to increase your position, we would suggest buying half now and half either in one month from now or on drop in gold towards its 200 day moving average, whichever of the two comes first.

The skoptionstrading team is considering the possibility of selling August puts with strikes below $1140. Once those puts expire, and hopefully expire worthless if our analysis is correct, we will then look at buying 'out of the money' call options on gold again, with strikes above $1250 and expiring in January 2011.

Selling 'out of the money' front month puts may not be the most exciting trade, but we believe it is the right way to go for the next month. Although there may be many great opportunities in gold mining and exploration stocks, this is not our area of expertise and we see no reason to take on the addition risks of mining with no evident reward in the stock price performance to justify such risk.

For more details on our options trading strategies, take a look at our website www.skoptionstrading.com and our premium options trading service OptionTrader, which delivers trading signals and market updates via email.

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