Prospects of gold stocks in the next few weeks

Gold-market watchers are hoping that the results of the Ukrainian elections on Sunday and June options expiration on Tuesday may finally prod the market out of the tight trading range it has hewn to since late March.

In the Kitco News Gold Survey, views were mixed. Out of 33 participants, 22 responded this week. Of those, nine see prices higher, seven see prices down and six see prices trading sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.

As gold prices have remained range bound, physical demand has been lackluster, even in China. The World Gold Council said earlier this week that Chinese investment demand plummeted 55% in the first quarter versus 2013’s first quarter, although jewelry demand rose.

Robin Bhar, head of metals research at Societe Generale, said there appears to be some ratcheting down of tensions between Ukraine and Russia, but whether those tensions continue to relax will depend on who is elected. The easing of geopolitical worries has weighed on gold, and given the improving macroeconomic outlook, Bhar said gold prices may try to test the downside, but if geopolitical tensions heighten again, gold prices could find support.

Several technical-chart analysts said as gold holds in a sideways trade, several important daily moving average levels are beginning to converge, and that may mean gold could move out of this wedge, or triangle, technical chart pattern. They said the 50-, 100- and 200-day moving averages all reside between $1,296.20 and $1.302.20, and a close above or below this range could finally spur trading. Analysts said given how tight of a range it is, there could be many pre-placed buy and sell orders above and below the market and could lead to volatile trade if triggered.

Bhar said it will be important to watch how gold reacts once it breaks through the range. “You never know how these things might work out. Market players will be judging how orderly the price movement will be,” he said.

A sharp move, say, $10 lower in five minutes, could trigger more selling, but if prices only fell, say $2, it may not encourage a cascade of selling, he said.  

For market participants who expect a violent move up or down, there is a way to take advantage of the volatility and not necessarily try and forecast which way the market moves.   

To take advantage of the chance of a big price swing when gold finally breaks out of its trading range, Sean Lusk, director commercial hedging division, Walsh Trading, suggested traders could put on an options strangle or iron condor position. These options trades looks to capitalize on a move in prices, but are indifferent to how that move occurs.

Lusk said with the June options expiration on Tuesday and the results of the Ukrainian elections Sunday, a move out of the trading range could come as early as next week.

“The longer it (trades in a wedge formation), the probability of an extreme move either up or down becomes greater, a lot greater. We’ve seen this before; we’ve had many instances before. Whatever the trigger is we don’t know, nor should we care,” Lusk said. “We’re either going to trade to $1,260, $1,240 or $1,350.”

Lusk said he is recommending to clients a strangle trade, where an investor buys a Comex July $1,350 call and a July $1,250 put at the same time. Buying calls is a bullish trade and buying puts is a bearish trade. If the futures market trades to around $1,350 or $1,250, the options positions become in the money and the options can be activated. Calls and puts are the right, but not the obligation, to buy or sell at a certain price.

He alternatively suggested an iron condor, where an investor buys the July gold $1,340-$1,370 call spread and simultaneously buys the July $1,250-$1,220 put spread. Again, if prices trade to $1,250 or $1,350, then the call spreads are in the money.

Source: Public