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Looking to the Futures

Interest in Gold Spreading as Futures Eclipse $1,800

Key Points
  • Gold ETF’s Swell with Record Inflows as U.S. Infections Remain Persistent

Every once in a while, fans of gold as an investment get their time to shine. With interest rates near zero around the world, bonds and cash seem to be less in favor while equities and gold have emerged as popular opportunities for real investment returns. As Covid has maintained a stubborn regional presence, economic recoveries don’t seem to have a clear path, hinting that additional fiscal stimulus could provide further tailwinds for gold.

Wednesday’s price action in the gold pits saw August gold futures hit 1829.80, notching the safe-haven metal’s highest level since September of 2011.

Money managers have looked to gold exposure as uncertainty surrounds the duration of the Coronavirus outbreak. Gold’s rally could be at risk when a vaccine is brought to market or if the pandemic tapers through other means. Other global events like falling commodity prices and this fall's U.S. presidential election add to the mix and keep the metal a focus of attention.   

Gold-backed ETF’s have been attracting more and more investment capital with Thursday marking the 10th consecutive day of net inflows. Wednesday we saw a net inflow equivalent to almost 200,000 ounces, creating a net inflow for the year of 26%. Gold ETF’s now control roughly 104 million ounces.

While Investors are looking to future developments, historical trends are employed to access gold’s theoretical value as well. Looking to the gold-to-silver ratio as a gauge, it has remained at elevated levels recently, near 95x. Calculated by simply dividing the gold price by the silver price, modern-day extremes for the ratio include a bottom in 1919 with a reading of 17.73, then a reading near 100 in 1991. Investors watching the gold/silver ratio would see the 50-year average is around 59.

Gold Futures

Gold futures contracts offer fairly high leverage, requiring about 6.5% initial margin for overnight positions. The August 2020 contract, controlling 100 ounces, recently traded at $1,806 an ounce. Recent extremes for gold prices include a low near $600 in pre-financial crisis 2006 and a high near $1,921 in September of 2011. 

Looking back at gold futures’ substantial 17% rally year-to-date is easy, but the task for gold traders now includes avoiding the wrong side of the next breakout, and some may use a combination of futures and options to engage the opportunity.

Trading Gold Futures Options

With the possibility that the next breakout could be somewhat dramatic, outright long or short futures positions bring risks that may be undesirable since each futures contract brings exposure to about $180,000 worth of gold. Futures options strategies can add value here, allowing for customized risk/return positioning that investors may be more comfortable with.

Options traders will find a deep, liquid market for gold futures options. Weekly expiration options are available with Friday expiration and moderate volume. The monthly options expire near month’s end and enjoy high participation. 

Implied volatility for gold futures options is currently elevated, but lower than the spike that occurred in March. Short-dated (14 days) near-the-money options are displaying implied volatility readings near 17, while longer-dated options with November expiration show slightly higher readings in the high-teens.   

Gold ETF option implied volatility can be monitored with ticker $GVZ, which measures the market's expectation of 30-day volatility of gold prices by applying the VIX methodology to options on SPDR Gold Shares (GLD). Like other indexes using the VIX methodology, GVZ uses options spanning a wide range of strike prices, and currently is near 18.

Technicals August 2020 Gold Futures   

The 14-day relative strength index holding near 70, along with rising stochastics, could be a sign of an overbought market. The short-term outlook is encouraging with the close above the 9-day moving average. Hightower research points to critical support at $1,796. 

Resistance 2      1,836.40

Resistance 1       1,821.40

Pivot                    1,810.50

Support 1            1,795.50

Support 2            1,784.60

9-day SMA          1,796.80

20-day SMA       1,780.52

50-day SMA       1,754.20

200-day SMA     1,637.37

10-day RSI          62

Contract Specifications

Trading Calendar

Producer Price Index                          07/10/2020 8:30 a.m. ET

Consumer Price Index                        07/14/2020 8:30 a.m. ET

First Notice August Gold Futures    07/31/2020

 

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against trading losses.

Futures trading offered and positions held through Charles Schwab Futures, Inc., a separate but affiliated company of Charles Schwab & Co., Inc. Both are subsidiaries of The Charles Schwab Corporation. Futures trading involves substantial risk and is not suitable for all investors. Please read Risk Disclosure Statement for Futures and Options.

Virtual Currency Derivatives trading involves unique and potentially significant risks.  Please read  NFA Investor Advisory – Futures on Virtual Currencies Including Bitcoin and CFTC Customer Advisory: Understand the Risk of Virtual Currency Trading.

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