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Looking to the Futures

Gold Catches Bid During Viral Uncertainty

Key Points
  • Gold Prices Reaching 7-Year Highs with Pivot to Safe-Haven

April 2020 gold futures were trading near $1,644 Friday morning, testing 7-year highs as investors sensing turbulence seek safe havens like gold and U.S. treasuries. Coordinated rallies in both gold and the U.S. Dollar Index, which are present now, reveal a symbolic safe-haven migration.

Up over 8% this year largely on virus concerns, the yellow metal may also catch tailwinds from projections for continued low interest rates, as disclosed in minutes from the latest Fed meeting. While the Federal Reserve hinted they could leave rates unchanged for many months, a glance at the Fed Funds Futures reveals that the market expects at least one rate cut this year. All things being equal, lower borrowing costs make precious metals more appealing because there is no yield to discount.

Late in 2019 money managers had been looking for gold exposure as uncertainty surrounded the U.S. – China trade deal, but as progress was made on the Phase 1 trade agreement prices leveled off and bullish position were drawn down. Now another global event, the Coronavirus, has pushed gold prices higher and led to elevated levels of bullish investment positions in gold.  

Data on open gold futures position from the CFTC shows that the average reading over the past 15 years is roughly 121,000 net long contracts. But recent data revealed positions that exceed over 229,000 net long contracts and the bullish bias that money managers are taking on right now. A record spike in bullish positioning evolved last summer as gold futures positions for money managers ramped to a net-long equivalent of 277,968 contracts.

Recently we’ve also seen new records in the amount of participation in world-wide bullion-backed ETF’s. The timing of these swelling positions, which have increased for six consecutive weeks now, synch with the start of the virus crisis.

As investors turn to gold for various reasons, one approach to gauging gold’s relative valuation, the gold-to-silver ratio, is flashing a relatively high reading of 88. Calculated by simply dividing the gold price by the silver price, modern-day extremes for the ratio include a low of 17.73 in 1919 and a high near 100 in 1991. Investors watching the gold/silver ratio would know that the 50-year average is around 58.

Gold Futures

Gold futures contracts offer fairly high leverage, requiring about 4% initial margin for overnight positions. The April 2020 contract recently traded at $1,644 an ounce, with each contract controlling 100 ounces. Extremes for gold prices over the last 20 years include a low near $250 in 2001 and a high near $1800 in 2011. 

Gold Futures Options

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. 

From Schwab’s www.StreetSmartCentral.com, sample futures options trades are generated in the Idea Hub. Strategies can be explored by clicking into an idea and reviewing the characteristics of the trade. Idea Hub ideas are strictly educational in nature and are not predictive, nor are they recommendations.   

Implied volatility for Gold Futures Options is currently holding in the low double-digits for short-dated near-the-money options. Ticker symbol $GVX, the Cboe/Comex Gold Volatility Index, offers a quick reference to the pricyness for gold futures options, calculated using the Cboe’s VIX methodology. 

Technicals April 2020 Gold Futures

Positive action is seen as the April gold contract moved above key moving averages. The RSI approaching 70 could point to an overbought condition. Several other developments in the past week could be construed as short-term bullish, including MACD and a triple moving average crossover.    

Resistance 2     1623.5

Resistance 1      1617.7

Pivot                   1610.0

Support 1           1604.2

Support 2          1596.5

SMA 20 Day     1620.4

SMA 50 Day     1616.9

SMA 200 Day   1612.4

RSI (10)            .68

Contract Specifications

Trading Calendar

Consumer Confidence                        02/25/2020 8:30 a.m. ET

EIA Crude Oil Report                         02/26/2020 10:30 a.m. ET

GDP                                                        02/27/2020 8:30 a.m. ET

EIA Natural Gas Report                     02/27/2020 10:30 a.m. ET

 

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