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Using Options to Capitalize on Strong Fundamentals in Gold

By Chris Vermeulen and J.W. Jones

NEW YORK ( TheGoldAndOilGuy.com) -- Throughout most of 2013, gold futures have been under major selling pressure. Gold opened the year trading around $1,675 per ounce. As of the Monday close, gold futures were trading around $1,220 per ounce, which would mean that thus far in 2013 gold futures have lost more than 27% of their value.

Looking back to September 2011, gold's all-time high came in around $1,923 per ounce. In a little more than two years, gold prices have dropped around $700 per ounce representing a total loss of more than 36% based on the Monday closing price. I would say most analysts would agree that gold has been in a bear market over the past two years.

Before we begin looking at a few ways to use SPDR Gold Trust ETF (GLD) option structures to take advantage of higher future prices in the yellow metal, I thought I would focus readers' attention on some bullish fundamental data for gold. Let us begin with a chart of the Federal Reserve's Total Assets which is shown below.

The data shown above comes directly from the Federal Reserve's public database. Essentially, this is the Fed's balance sheet and it's obvious that the money printing has gone parabolic. The Federal Reserve prints money to purchase Treasuries and mortgage-backed securities, which end up on the Federal Reserve's balance sheet.

Interestingly enough, the chart above illustrates the amount of money the Federal Reserve has been printing since the beginning of 2011. The chart below illustrates the price of gold futures during the same period.

Gold futures have moved lower in price while the Federal Reserve has printed an unprecedented amount of money through the quantitative easing program. It has been pointed out that the flow of liquidity is more important than the total money stock, but these two charts when viewed together are rather odd at the very least. However, we must all continue to remind ourselves that there is no manipulation of any kind going on.

Another odd situation has developed regarding the gold miners and the price of gold relative to production costs. The gold spot price has essentially moved down below the average 2013 cash cost of $1,250 - $1,300 per ounce. Price action in gold futures is rapidly approaching the marginal cost to produce gold which is around $1,125. The chart of the various gold production costs is shown below.

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