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Gold/Silver: Your next options play

Commentaries & Views

This week, precious metals came under significant pressure as the risk-off sentiment weighed in on most asset classes. Persistent inflation continues to confirm after this week's CPI and PPI data. We expect Gold and Silver prices to trade in a defined trading range throughout the remainder of the year, with prices rebounding into early 2023. Precious Metals are still pricing in a U.S. recession, rising treasury yields, and a firm U.S. Dollar. The probable outcome for U.S. Equities is a push in the S&P down to 3500 by year-end. Turning towards 2023, we expect the rate hike cycle to be complete leaving Precious Metals prices skewed to the upside.

Daily Gold Chart

With prices and ETF holdings seeing significant outflows, one should ask themselves at what point will the physical buying come back into the markets? While analyzing the long-term chart, Gold futures have come back down to levels not seen since the early stages of the pandemic. Traders should now expect the downside to be limited with reports of India lowering the import tax on Gold, which may spark new physical demand. The first resistance area is the 50 DMA at 1736.9; a break through this level should spark a short covering rally that could easily extend back to 1800. To further help you develop a trading plan, I went back through 20 years of my trading strategies to create a Free New "5-Step Technical Analysis Guide to Gold but can easily apply to Silver." The guide will provide you with all the Technical analysis steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Gold.

Gold Options Strategy

This strategy is similar to our published recommendation on Silver over the past few weeks. Those who participated through our company were strongly encouraged to exit on the September 12 surge in prices. Now with Gold back at support, we will look at a similar calculated risk strategy.

In the past, I have found that it is best to use a calculated risk strategy in deeply oversold markets that haven't quite solidified a technical bottom. An options bull call spread is a trading strategy aiming to capitalize on an increase in the price of a given market or asset during times of high volatility or for counter-trend trades. The option strategy consists of two call options that create a range that outlines a lower strike point and an upper strike point. The bullish call spread strategy helps to cap your max loss if the price of an asset drops. However, the strategy also limits the potential gains in case of a price increase. Bullish investors often use this when trading futures as a calculated risk debit spread.

We use the February 2023 Gold futures contract in this bull call spread example. We are buying 1 February Gold 1750 call at $45 as our long call. We then simultaneously sell 1 February Gold 1750 call at $22 as our short call. This action creates our premium, which is $23. We then multiply that by $100 to account for Gold's multiplier (Gold is a 100-ounce contract) to get $2,300, or our total premium paid (plus any commissions or clearing fees).

Knowing our premium paid, we can calculate our potential max profit simply by taking the difference in our strike prices ($1850 - $1750), which in this case is $100, then we multiply $100 by $100 because this is a futures contract. That gives us a total of $10,000 as our max gross profit, minus our $2,300 premium, leaving us with a max net profit of $7,700 (less any commissions or clearing fees). If you have never traded futures or commodities, I just completed a new educational guide that answers all your questions on transferring your current investing skills into trading "real assets," such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.