Gold is the new black.

- Scot Hicks

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October 2, 2007

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Fire must have some basic elements to exist: fuel, oxygen, and a spark. If gold was the proverbial flame, I believe we have already supplied the fuel in the name of a dollar crunch. The credit crunch is a perfect supplier of oxygen for our impending fire. Now, we just need to have the central banks allowing gold to rally and we have the perfect mix to start a gold fire up to $1,000.

Is this scenario really possible? I think so, but so do a lot of other investors. A new report put out by Citigroup says that "Central banks have been forced to choose between global recession or sacrificing control of gold, and have chosen the perceived lesser of two evils," says the authors John Hill and Graham Wark.

"We believe that the policy resolution to the credit crunch will take the firm of a massive, extended 'Reflationary Rescue,' in a new cycle of global credit creation and competitive currency devaluations. This could take gold to $1,000 an ounce or higher."

Against a backdrop of gold catapulting to a 28-year high and trading at the $740 per ounce (a level not seen since January 1980) the question becomes, as an investor what does it mean to me? My opinion is that it means plenty! Certainly, with gold theoretically moving toward $1,000 an ounce there other ramifications potentially to your entire portfolio. Stocks can and will be impacted. To be sure, the dollar and everything connected to it will be affected. But, as a futures broker I feel that there are some viable opportunities in the futures and options side of the gold market.

First, let's look at some market basics and then I will show you some ideas on how to trade the gold market. If you are an experienced gold futures and options trader, skip down to trade ideas. Futures and options do carry substantial risk and are not suitable for all investors.

Gold Basics

COMEX Division gold futures and options provide an important alternative to traditional means of investing in gold such as bullion, coins, and mining stocks

Gold futures contracts are also valuable trading tools for commercial producers and users of the metal. Commercial concentrations of gold are found in widely distributed areas: in association with ores of copper and lead, in quartz veins, in the gravel of streambeds, and with pyrites (iron sulfide). Seawater contains astonishing quantities of gold, but its recovery is not economical.

Contract Specification for Gold Futures

Trading Unit
100 troy ounces.

Price Quotation
U.S. dollars and cents per troy ounce.

Trading Hours (All times are New York time)
Open outcry trading is conducted from 8:20 AM until 1:30 PM.
After-hours electronic trading begins at 2:00 PM on Mondays through Fridays and concludes at 8:00 AM the following day, with the exception of Friday's session which concludes at 4:30 PM that same day. On Sundays, the session begins at 7:00 PM and concludes at 8:00 AM the following day.

Trading Months
Trading is conducted for delivery during the current calendar month; the next two calendar months; any February, April, August, and October falling within a 23-month period; and any June and December falling within a 60-month period beginning with the current month.

Minimum Price Fluctuation
$0.10 (10¢) per troy ounce ($10.00 per contract).

Maximum Daily Price Fluctuation
Initial price limit, based upon the preceding day's settlement price, is $75.00 per ounce. Two minutes after either of the two most active months trades at the limit, trades in all months of futures and options will cease for a 15-minute period. Trading will also cease if either of the two active months is bid at the upper limit or offered at the lower limit for two minutes without trading. Trading will not cease if the limit is reached during the final 20 minutes of a day's trading. If the limit is reached during the final half hour of trading, trading will resume no later than 10 minutes before the normal closing time. When trading resumes after a cessation of trading, the price limits will be expanded by increments of 100%.

Last Trading Day
Trading terminates at the close of business on the third to last business day of the maturing delivery month.

Delivery
Gold delivered against the futures contract must bear a serial number and identifying stamp of a refiner approved and listed by the Exchange. Delivery must be made from a depository licensed by the Exchange.

Delivery Period
The first delivery day is the first business day of the delivery month; the last delivery day is the last business day of the delivery month.

Exchange of Futures for Physicals (EFP)
The buyer or seller may exchange a futures position for a physical position of equal quantity. EFPs may be used to either initiate or liquidate a futures position.

Grade and Quality Specifications
In fulfillment of each contract, the seller must deliver 100 troy ounces (+/-5%) of refined gold, assaying not less than .995 fineness, cast either in one bar or in three one-kilogram bars, and bearing a serial number and identifying stamp of a refiner approved and listed by the Exchange. A list of approved refiners and assayers is available from the Exchange upon request.

Position Accountability Levels and Limits
Any one-month/all months: 6,000 net futures equivalent, but not to exceed 3,000 in the spot month.

Margin Requirements
Margins are required for open futures positions.

Trading Symbol
GC

Trading Ideas

If you are wishing to play the gold futures market from the long side my opinion is that like any trade it is a function of balancing risk. Are you looking for the big move from $750 to $1,000? If that is the case then you realistically need to be prepared for corrections down into the $680 to $700 range.

As for options there are a couple of routes. First, take a look at selling December gold 690 puts. For a pair, the margin would be about $2,100 and as long as gold stays above $693 between now and expiration in 57 days, you could collect about $520 in premium. As a naked short option position, this comes with substantial risk similar to futures.

Want an options strategy with limited risk? You could buy 3 December $800 calls for a total of about $2,600. If December gold can ascend to $850 at expiration you would stand to make around $10,000 on your $2,600 investment. Since you are buying options, there is no margin calls but the flip side is that the options are a wasting asset and you would stand to lose your investment if the gold market does not take off as expected.

After college graduation in 1986 Scot Hicks began his futures career on the floor of the Chicago Board of Trade working as a runner on the grain floor. Scot progressed to doing grain market research and then began handling client business in 1988. From that time on, he has been involved in some capacity of futures trading system administration or management. Scot hasn't seen it all, but he has seen a lot. Over the years he has written articles for Futures Magazine, and SFO Magazine. Scot's articles have also appeared on Bondheads.com. Scot currently oversees operations for an Introducing Broker head quartered in California called Trade Center, LLC.

Looking for options trades that make sense?

New from Trade Center: The Options Sense Advisory Service. Options Sense is an options advisory service delivered once each trading day. Using proprietary models and analysis, you are offered value strategies. These high probability strategies attempt to capture option premium as opposed to simply buying an option. Why not see for yourself? Sign up for a COMPLIMENTARY Trial!