Stutland: Time to Pick a Bottom in Gold?
Gold bugs, here are some answers for you.
The SPDR Gold Trust looks poised to post the fourth down week in a row, which has prompted some options traders to begin picking a bottom. Yesterday the largest GLD trade was the sale of 20,500 November 162-strike puts for $0.77.
What's the point of this strategy?
Well, selling a put allows you to pick a level at which you are willing to buy a stock, and to collect premium while you wait for the stock to come to your chosen entry point. This option trade allows the trader to effectively buy GLD at 161.23, which coincides with the 200-day moving average at 161.44.
The recent sell-off in gold can be attributed to moderate strength in the dollar and to risk asset selling. Since the beginning of October, gold, crude oil, the S&P 500, and the 10-year bond are all lower, while the US dollar index is higher.
(Read More: Everyone's Bailing on Commodities: 'Into the Abyss'?)
In the short term, I would not be surprised to see gold continue to trade a bit lower. However, once the Fed's QE-infinity has run for a few months, the monetary base will be much higher, and increasing inflation expectations are likely to take GLD higher. Picking a bottom in a market is always tough, but for a long-term investor, buying GLD around the 200-day moving average is likely to look like a brilliant trade in a few years. Worldwide central bank liquidity programs mean that the fundamentals driving gold's rally over the past few years are still very much in place. It is only a matter of time before the effects of quantitative easing are seen in the economic data, and this will send gold higher if we don't get the kind of GDP growth that we will need to improve the unemployment picture.
Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."
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