Golden Opportunity with Defined and Limited Risk
Source: Seeking Alpha, Jack Walker (11/24/08)
Despite the continuing US dollar strength, gold turned higher on Friday with Comex cash gold breaking out above 778.16. Since gold is currently oversold this move could be just short covering, but it could also be the start of something more.
Here are some considerations.
This is a noteworthy breakout from a consolidation pattern formed by the October 22nd low for gold.
Physical demand has been reported very strong perhaps reflecting a loss of confidence in the banking system.
The long-term seasonal price pattern usually reaches its peak in late December.
Hedge fund liquidations and tax loss selling may soon be ending.
This is an uncertain market environment and gold may be worth considering once again in the event this recent breakout proves to be more than just short covering.
Here is a bull call spread suggestion for a long position in the gold ETF with defined and limited risk: SPDR Gold Shares (GLD) (78.85). The Trust holds gold and issues shares in exchange for deposits of gold.
With large trading volume and open interest the bid/ ask spreads in the options are reasonable. The current Historical Volatility of the ETF is 45...