How do you take advantage of a volatile gold environment?

“Gold price volatility has increased sharply.

Gold had a $183.70 price range in three weeks, from late June to this Wednesday.

Gold had a $92.70 spread in three days, from Wednesday 17 July to this morning.

This volatility seems most likely to continue if not increase further over the next several months.

The ultra-short term, the next two weeks, seems skewed to the downside, but beyond that the outlook seems skewed to the upside. Prices could move sharply either way: A range between $2,300 and $2,500 would not be surprising, just as a $100 range over the past three days was not surprising. (CPM predicted such in our 16 July Gold Trade Recommendation.) Any price decline has potential to be short-lived, with investors using price softness as a reason to buy gold to hedge against the numerous risks.

Beyond the next two weeks, the outlook is skewed to the upside.

There are a myriad of options strategies that could help with investors’ objectives.
This morning CPM looked at a variety of straddles, spreads, and participatory options structures.

Perhaps the best short-term option strategy at present is to buy an October gold put and to buy an October gold call.

Based on the Comex October gold contract currently trading around $2,430, an investor could buy a Comex October put with a strike price of $2,300 for around $15. A Comex October call with a strike price of $2,500 could be purchased for around $34. The price of gold does not have to reach either of those levels for such options to show large percentage profits on their costs.

Should prices fall toward $2,300, the price of the put could rise in value and there could be potential to sell the put at a higher price than it was purchased. The same is true for the call option if gold prices near $2,500. Both of these options could be held in case gold prices move sharply out of their recent range.

Price volatility could ease in the coming days, lowering the costs of these options. Additionally, investors might consider buying a December option.

Producers could consider a participatory option strategy that might protect them from lower prices after the U.S. Presidential election, while longer term investors might consider a shorter-maturity participatory structure to take advantage of what might be higher prices in the final four months of 2024 and first months of 2025.

CPM also is looking at gold and silver butterfly straddles that might be attractive in advance of the election. On 7 October 2016 CPM structured a straddle based on the view that gold prices would rise. This strategy was predicated on the CPM view that whoever won the U.S. presidential election that year, the U.S. and world would be worse off. We used December Comex gold options. On 7 November we recommended that our clients take profits, which were 125.5% during the month and two days the position was held.”