Option Play (GLD) For the Gold Rush

Market Summary

Last week, Fed Chairman Ben Bernanke gave a policy speech at Jackson Hole Wyoming that hinted at the inevitability of further quantitative easing (QE). Market action following Bernanke's comments suggest that traders don't anticipate the Fed will announce the next round of QE at their upcoming policy meeting in a few weeks, but expect the next program to start in the fall. Reacting to the expectation of more QE, the dollar plunged to its lowest level in three months on Friday based on anticipation that the Fed will probably flood the economy with even more dollars to purchase assets - this in turn will further drive down the value of the dollar. As a direct corollary to further quantitative easing debasing the dollar and Fed asset purchases, precious metals exploded after Bernanke's speech – a lower dollar equates to higher gold prices.

  

Investor Analysis

Gold hit bottom this past May and prices moved higher in June. In subsequent months gold traded range-bound as inflation was subdued and the dollar was strong. A few weeks ago, concerns about rising interest rates and higher inflation pushed gold prices higher through the top of the trading range. As mentioned above, the Fed Chairman's speech set the tone for gold to explode back towards higher price levels set the end of last year – about the same time as the Fed did the previous version of QE.

Possible Strategy

Above a daily chart for the SPDR Gold Shares (GLD) exchange traded fund (ETF). GLD is a popular ETF investment that seeks to replicate the performance, net of expenses, of the price of gold bullion. Investors interested in participating in the 'gold rush' can buy into the actual GLD ETF. Or a more cost effective option might be to purchase GLD call options. Purchasing the October GLD $164.00 strike price call option would cost approx. $4.00 per share (based on yesterday's close), but would generate gains the further gold moved higher prior to October 19^th. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

By Gregory Clay