Gold Price Falls on Global Turmoil

Gold recently rallied by over $50 from an open last Wednesday at $1117 and peaking on Monday at a high of $1169. That was short lived as the shiny metal dimmed and we witnessed three days of consecutively lower prices, now trading at $1125. The reversal in gold coincided with the sharp drops in major worldwide stock indices; on Monday the S&P dropped 4.1% and gold followed suit. Concern over the state of China’s economy and the devaluation of its currency have been major factors driving stock and gold prices down. Up until now, the general strength of the US Dollar has also been putting pressure on the price of gold and further strong US economic data may keep that in place. Today data for US Durable Goods Orders was released, the market expectation was for a reduction of 0.4% but the actual release was +2.0%. The US Dollar will most likely benefit from these strong numbers and again this means more downward pressure on gold price. Price went from $1131 at the time of release to $1125 ten minutes later.

Technical Analysis

From the gold day-chart we can see last Friday’s and this Monday’s candles have formed a double top formation (blue area), this is usually an indication of trend reversal. It also coincided with the Ichimoku cloud (vertical pink lined area) which acts as a resistance area. Looking at the Stochastic Oscillator we can see that price is beginning to look like it has reached overbought territory. I wouldn’t be surprised to see price continue its correction downwards, or return to its original bear trend, over the next week. The MACD is still showing upward momentum, but that is in contradiction to the last three days, which dictates further weakness may yet to come.

The following examples traded on the ORE web-platform explain how to take advantage of gold price action with Options. 

Trade 1 - Trading an Uptrend

If you think the rally in gold is set to continue over the next week then you may buy a Call option, which gives you the right to buy gold at a specific price (strike) with a specific date (expiry). As you can see from the screenshot a Call option to buy 10 ounces of gold at $1124.07 strike, over the next 7 days would cost you 119.92 USD, which is your maximum risk. As the price of gold rises above the strike price $1124.07, the option’s value will rise and you may profit. You may also close the position before expiry to lock-in a profit or loss.

Trade 2 - Trading a downtrend

On the other hand, if you think that the price of gold will continue to fall over the coming week then you may buy a Put option, which gives you the right to sell gold at a pre-determined strike, expiry and amount. Looking at the screenshot you can see that a Put option to sell 10 ounces of gold at strike $1123.57 over the next 7-days would cost you 120.54 USD, which is also your maximum risk. As the price of gold declines below the strike price $1123.57, the option’s value will rise and you may profit. You may also close the position before expiry to lock-in a profit or loss.