While optimists continue to search for any sign of a pulse in the US economy, the realist investors among us are resigned to the fact that equities, and most commodities, remain in bear markets. If you are a call seller, this is good news and aside from a few aberrations, you should continue to collect steady option premiums over the near term.

However, for the traders among us who, for some reason, simply feel more comfortable writing puts, the Gold market may be your salvation. For while industrial commodities markets such as copper, crude oil, and natural gas remain under the “double-whammy” influence of a rising dollar and plummeting global demand, gold remains at least partially immune to the bearish pressure.

Regardless of what may happen down the road, for the time being, the international community continues to plow money into the US dollar, feeling it is still the safest place to be. While this is good for the value of the dollar, it pressures all commodities, including gold.

However, there is one key difference that separates gold from its blue collar cousins. Copper, oil, and gas all derive the majority of their demand from the commercial/industrial sectors. When economies slow, demand for these products slows.

Gold, however, derives a large portion of its overall demand from the investment sector. It is often investor demand that drives the price of gold – often far outstripping its demand from the commercial sector. Consequently, economic turmoil, strife or even recession can often be supportive to gold prices as wary investors often flock to gold as a haven.

Despite what price charts may show, this “flight to quality” by investors during the current financial crisis has and continues to occur. It is simply that the upwardly mobile US dollar has acted as a counterweight and has kept a lid on Gold prices.

Gold was a full participant in the commodities bull market that started in 2001 and climaxed with 2008’s spectacular highs. However, this difference in demand sources is one major reason for the disparity in price levels between industrial commodities and gold.  Crude oil is down over 73% from its 2008 highs. Copper is down over 62%. Gold is only off about 15% from its all-time highs last July. Again, investor demand is the difference.

It stands to reason, then, that should the US dollar turn and begin heading decidedly lower, Gold prices have enough investor demand to drive it substantially higher. In addition to the flight to quality crowd, the inflation hedgers would almost assuredly come out in force. This would create a very bullish scenario for gold.

Nonetheless, we do not envision this happening over the near term. The Obama-led stimulus package and infrastructure spending will almost certainly increase the Federal debt and US money supply, eventually pressuring the dollar. However, the effects of these programs on the dollar are probably many months, if not years away.

In the near term, the dollar remains the place to be for the international crowd.

But investor demand for gold is not going away either, and should continue to grow as frustrated and/or jittery investors (who haven’t learned how to sell options yet) search for a safe avenue to stash capital.

Because of this, gold should, at the very least, continue to outperform many other commodities on a net basis. If global commodities prices continue to fall, gold should hold up well. If global commodities prices begin to recover or if the US dollar begins to weaken, gold should rise faster.

This does not mean we project a raging bull market in gold. But we do expect prices to remain relatively firm and that makes an excellent candidate for sellers of puts.

Option strikes are currently available at several dollars below the existing market price for gold – price levels we do not feel will be threatened.


Figure 1: April 09 Gold

Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.

For more information about Gold and Option Selling, please see AU Editorial: Maybe Gold is a "Noah" White Dove, by Tom Scollon, Jan 19, 2009 at Optionetics.com.

James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group/Optionsellers.com
Optionetics.com ~ Your Options Education Site
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