How to Invest in Gold’s Recent Volatility

Commodities Investing, Gold & Silver, Options

Given the ongoing talk about rising inflation, some investors are turning to gold as a way to possibly diversify their portfolio. There are many ways to invest in the yellow metal, whether through exchange-traded funds (ETFs) or by buying physical gold.

Gold Bars

Gold ETFs offer exposure to gold in your investment account without holding the physical gold bullion. They’re best suited for the short-term investor focused more on diversifying their portfolio, with the ability to buy and sell the asset quickly. But these ETFs also carry more risk and don’t offer the right to trade the commodity.

Spot gold hit an all-time high of $2,063 an ounce in August last year but now trades just above the $1,800 level. The recent low was near the $1,750 area in late June and $1,675 in March.

One of the best ways to directly trade Gold is through the SPDR Gold Shares (GLD) and the SPDR Gold MiniShares Trust (GLDM). Both ETFs mirror the price of gold and hold only physical gold and, from time to time, cash. The latter represents fractional, undivided beneficial ownership interests.

You can also trade options on GLD, with both making mini-breakouts last week towards their 50-day and 200-day moving averages. The chart shows a recovery from the mid-June plunge from $171 towards the $165 level following the recent gap higher.

There is still risk of GLD reversing its recent uptrend if the 50-day and 200-day moving averages aren’t cleared and fail to hold. A backtest towards previous levels could force the 50-day moving average below the 200-day moving average and would form a death-cross.

This technical pattern is typically a bearish development for lower lows with a close back below $168 likely confirming this outcome. Continued closes above $172 would be a more bullish development to get long GLD.

There are both weekly and monthly options to trade GLD with multiple near-term calls and puts that can be used to take advantage of a continued rebound, or a return to weakness. Although weekly options carry more bang for the buck, they can have wider bid/ask prices with less volume than monthly options.

The regular GLD August 172 calls that expire on August 20th are currently trading just below the $2 level and could be used as a short-term trade on continued strength. These call options are currently out of the money, but would be in the money, and more than double from current levels, if GLD is at $176, technically, by the closing bell on August 20th.

It would be prudent to see if shares can clear and hold the $172 level before possibly going long with these call options. As for the downside, a break below $170 would likely confirm a false breakout and another retest towards the $168 level.

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