FxWirePro: Gold recovery depends on Chinese recovery - Collars back in action for hedging golds puzzling trend

On a more positive note, gradually tightening supplies of many commodities - linked to production curtailments and a sharp slowdown in capacity expansion - in the face of rising demand should start to boost prices across a broad front by 2017.

India and China have been the nations to consume the most gold in the world accounts almost more than 65% of total consumption with Chinese demand still growing, base metal prices will end the decade at higher levels than seen today, as will gold.

On monthly plotting of technical charts of XAUUSD, the price has dropped back below sloping trend line of descending triangle to the current levels of 1083.14.

On the Comex division of the NYME, gold futures for February delivery were up 0.88% at $1,083.00.

Gold is up more than 2% since the start of the year as safe-haven demand has been boosted amid a global stock market rout, worries over the Chinese economy and heightened geopolitical tensions.

The February contract ended Thursday's session 1.24% lower at $1,073.60 an ounce.

Futures were likely to find support at $1,063.20, the low of January 4 and resistance at $1,091.50, Thursday's high.

If you think the prices of this precious metal are to spike up further but does not sustain at around 1,110.00 levels (that is 2-1/2 months' lows are seen where it is struggling hold the resistance at 21DMA), then cover your underlying exposures with collars strategy.

Gold CFDs rallied to two and half months' highs amid growing concerns on Chinese economic recovery which in turn keeps us worried that the Federal Reserve will hold off on hiking cycle until H2 2016. Therefore, we believe that the there is no handsome recovery for gold unless China recovers as this country has been highest importer of gold.

Hedging gold's uncertainty:

Write an OTM call option + hold an ITM put option (near month Call & mid-month put). Writing OTM calls may likely to fetch certain returns since any abrupt slumps in near future may be taken care by this instrument.

This helps as a means to hedge a long position in the underlying outrights by holding longs on protective put. Thereby, any declines in this commodity would be taken care by ITM put options since the holder of the put option will have right to sell at predetermined strike price at expiry in case of American style options.

Maximum return = Strike price of call - Currency spot price - net premium paid or Strike price of call - Currency spot price + net credit received on short side.