Be aware of high volatility in Gold (2010-03-23 Gold analysis)

The unexpectedly increased interest rate in India sent the stock markets to fluctuate to a larger extent. Investors worried that the other countries in Asia would follow, and globe markets dropped. While everyone is focusing on the equity markets, we should not ignore an important commodity which is somehow related to interest rates --- gold.

Gold price has been flat these days without much variations. However, it is eventually converging, and a pennant occurs. Following such magical pattern would be a highly volatile price movements, either straightly going up or down.



So we can see that the red line is a middle-run line, with supporting function in the beginning and now becoming a resistance. If the gold price is to break through the pennant, for going upwards, it would have to break the difficult-to-break red line. On the other hand, would it signal a big drop? Theoretically, when interest rate increase, people would less prefer gold. Then the price would drop.

While we are uncertain about the movements, why don't we simply bet on the high volatility of gold? We can long both call and put options. Then if the price really moves in great extent, we can gain no matter which way it goes.