Gold Setting Up Early By Christopher Mistal & Rose Conforti Yesterday gold was declared to be in a bear market by mainstream media using the typical 20% correction definition from its record high close last August. The headline proved premature and somewhat misleading as gold was actually lower last December and its recent drop was less than 20%. Nonetheless, it was a headline that caught our attention, well at least the contrary in us. Although seasonal strength in gold typically does not begin until sometime from late June to early August, it was time to take a look at entering a new long position ahead of schedule. Fundamentally, gold has been under pressure due to a drop in demand, primarily from the jewelry (demand from India dropped sharply in the first quarter) and technology sectors as prices are still more than 20% higher than a year ago. But investor demand remains robust, especially in China where physical gold demand rose 13% to a new quarterly tonnage record at the start of this year. Central banks have also been increasing purchases as they attempt to diversify their holdings. Despite strong investor demand, total demand was down in the first quarter of this year. A stronger dollar, due to on-going European debt issues and a Fed that has remained quiet about future liquidity measures, has also pressured gold and most other commodities. Demand from India is likely to rebound briskly as their wedding season approaches. Chinese and central bank demand is also likely to remain robust, and now that U.S. economic data is weakening, the Fed is not likely to remain silent much longer. When the Fed does begin to speak of additional measures, it is doubtful they will be supportive of the U.S. dollar which would address the last headwind to higher gold prices. From a technical perspective, today’s solid advance by gold appears to be no more than the result of its typical volatile nature. A $30-move is impressive, but has become rather common place over the past year. The Relative Strength indicator has improved and so has the faster moving MACD buy indicator. Confirming buy signals could come any day. New Recommendations Gold’s prospects appear bright and are setting up nicely. SPDR Gold (GLD) is the largest and most liquid of physical gold backed exchange-traded funds available making it the instrument of choice to trade. GLD can be bought on dips below $149.50. Employ a stop loss at 134.55. For tracking proposes this recommendation will appear in the ETF Portfolio. As an alternative to taking an outright long position in GLD, we consulted with trader Rose Conforti and she was able to provide two additional ways to trade gold using options on GLD or the August gold futures contract. Either of her trade suggestions can be executed when GLD is trading below $149.50. The trade strategy recommended above is very commonly used by investors who would like to own a certain underlying instrument at a particular price, but are not certain that the desired price level will be reached. We have identified a major support level around 140 in GLD and 1425 in the GC futures contract. If Gold prices decline to this level we are happy to automatically own either 500 shares of GLD or be long one GC futures contract. If gold trades sideways in a tight range or reverses and begins to rise, we keep the premiums sold at expiration. If the puts were to be executed and/or filled and we become uncomfortable with our long position due to the market environment at that time, we can then sell calls to buffer any further deterioration. Of course, we can buy back the short puts at any time prior to expiration. This position will need monitoring and nimbleness in execution should adjustments be required. Disclaimer Note: At press time, neither officers of the Hirsch Organization nor Rose Conforti held any positions in GLD, GC, or its options, but may buy and sell at anytime. Rose Conforti, Chief Strategist at Lotus Capital Group, has been trading stocks, stock options, stock index options, foreign currency exchange contracts and options on futures since 2007. She has a degree in Economics from the College of Mount Saint Vincent and is currently writing a book on options trading.