Commodities as an Asset Class!!

In a low-return world, high-yielding commodities have become the siren song of the asset-liability mismatch. Well supported by seemingly powerful fundamentals on both the demand (i.e., globalization) and the supply sides (i.e., capacity shortages) of the macro equation, investors have stampeded into commodity-related assets in recent years. Once a pure play as a physical asset, commodities have now increasingly taken on the trappings of financial assets. That leaves them just as prone to excesses as stocks, bonds, and currencies. This is one of those times.

Previously, It was argued that Chinese and US demand were both likely to surprise on the downside - outcomes that would challenge the optimistic fundamentals still embedded in commodity markets. It’s also hinted that the asset play could well reinforce this development - largely because commodities have now come of age as a legitimate asset class in world financial markets. The same is true of foreign exchange reserve managers and corporate treasury departments of multinational corporations. A former commodity executive now runs one major Wall Street firm and another has turned over management of its global bond division to the architect of its thriving commodity business.

Like all such trends, the expansion of the commodity culture is rooted in performance. It's not just the physical commodities themselves - most commodity-related assets in cash and futures markets have also delivered outstanding relative returns. For several years, the so-called commodity currencies of Australia and Canada have been on a tear, and big commodity producers like Russia and Brazil have led the recent charge in high-flying emerging markets. Within the global equity universe, the materials sector has been the number-one ranked performer over the past year - up 14%, or double the 7% returns of second-ranked financials. And, of course, there is the growing profusion of commodity-related ETFs. Meanwhile, Commodity Trading Advisors (CTAs) now collectively manage over $70 billion in assets - more than three times the total three years ago - and the IMF reports inflows of approximately $35 billion into commodity futures last year alone.

Significantly, the consultants are now urging institutional investors to implement a major increase in their asset allocation weightings to commodities. A recent Ibbotson Associates study recommends that commodity weightings in a multi-asset balanced portfolio could be increased, under conservative return and risk-appetite assumptions, to a high of nearly 30%. That would be more than three times current weightings and greater than seven times the estimated $2 trillion value of current annual commodity production (see T.M. Idzorek, "Strategic Asset Allocation and Commodities," March 2006, available on www.ibottson.com).

The Ibbotson analysis endorses commodities for their consistent outperformance and negative correlations with other major asset classes - going so far as to praise commodities for actually providing the protection of "portfolio insurance." It concludes by stressing "...there is little risk that commodities will dramatically underperform the other asset classes on a risk-adjusted basis over any reasonably long time period." Laboring under the constant pressure of the asset-liability mismatch, yield-starved investors can hardly afford to ignore this enthusiastic advice. As a result, with multi-asset portfolios likely to have ever-greater representation from commodities, the financial-market dimensions of the commodity trade should become increasingly important.

This transformation from a physical to a financial asset alters the character of commodity investments. Among other things, it subjects the asset to the same cycles of fear and greed that have long been a part of financial market history. From tulips to dot-com and now probably US residential property as well, the boom all too often begets the bust. Yale Professor Robert Shiller puts it best, arguing that asset bubbles arise when perfectly plausible fundamental stories are exaggerated by powerful "amplification mechanisms”. That appears to have been the case in commodities. In this instance, the amplification is largely an outgrowth of the China mania that is now sweeping the world - the belief that hyper-growth in commodity-intensive China is here to stay. That's why I blew the whistle on this one: Not only do we believe that the Chinese authorities will make good on their efforts to cool off an over-heated economy, but we also suspect they will succeed in engineering a well-publicized shift toward more efficient usage of energy and other commodities.

The potential for post-housing bubble adjustments of the American consumer could well be the icing on this cake - not only lowering US commodity demand through reductions in residential construction activity but also by reducing end-market demand in China's biggest export market. The recent data flow hints that such adjustments are now just getting under way - underscored by reports of a meaningful slowing of Chinese investment and industrial output growth in August and a continuing stream of bad news from the US housing market.

Meanwhile, the performance of commodity-based financial assets is starting to fray around the edges. That's true of energy funds as well as those asset pools with more balanced portfolios of energy, metals, and other industrial materials. While most of these investment vehicles have outstanding 3- and 5-year performance records, the one-year return comparisons are now solidly in negative territory for many of the biggest commodity funds. And this is occurring at the same time that the MSCI All-Country World index has delivered a 14% return for global equities over the past year. Underperformance for a few months is hardly cause for concern, but for both relative- and absolute-return investors, negative comparisons over a 12-month period are raising more than the proverbial eyebrow. As usual, the "hot money" has been the first to head for the exits, but more patient investors may not be too far behind. Shiller-like amplification mechanisms could well compound the problem. Just as they led to near parabolic increases of many commodity prices in March and April, there could be cumulative selling pressure on the downside - taking commodity prices down much more sharply than fundamentals might otherwise suggest.

For the money, there is far too much talk about the globalization-led commodity super-cycle. It gives the false impression of a one-way market, where every dip is buying opportunity. Yet commodities as a financial asset are as bubble-prone as any other investment. As is always the case in every bubble we have lived through, denial is deepest when asset values go to excess. That's very much the case today. After three years of extraordinary out performance, denial over the possibility of a sustained downside adjustment in commodity prices is very much in evidence - underscoring the time-honored sociology of an asset class that has gone to excess. Meanwhile, China and US-housing-related fundamentals are going the other way - setting up increasingly tender commodity markets for unpleasant downside surprises on the demand side of the global economy. The herding instincts of institutional investors could well magnify the price declines - when, and if, they emerge. All this suggests there is still plenty of life left in the time-honored commodity cycle.

Crude best clue to buy or sell gold!!

If you want to follow trends in gold prices, better study the crude oil market. Both gold and crude prices have been going in tandem in the last eight months. Going by the price movement of both commodities, it is clear that when crude price surges, so does the gold price. And vice versa. Based on this trend, bullion traders and investors have started tracking crude prices before buying and selling gold in a large quantity.

"As there seems to be a co-relation between these two commodities, we have started taking crude price into account before placing buy or sell order for gold," Monal Thakkar of Amraplai Industries, a leading bullion company, said. Crude prices, of course, have also started influencing the Indian bourses, albeit in an inverse manner. Whenever crude goes up, it adversely affects the market sentiments.

"The inverse relationship between crude prices and the stock market has been established in the past few months. But one reason for gold price to move in tandem with crude price could be inflation. Upward movement of crude price leads inflationary pressure in the economy and investment in gold is traditionally considered as hedge against inflation," C Jayaram, executive director, Kotak Mahindra Bank, said. Another reason can be the US dollar movement. Increasing crude price makes the US dollar weaker and a weakening dollar leads to higher exposure in gold.

So crude prices make an impact on gold via the dollar price movement. It may be pointed out that there was no direct correlation between crude and gold prices in the previous years. "The fact that this year gold price is moving in tandem with crude is prompting investors to take long positions in gold, on the assumption that crude prices are bound to rise further," Anupam Kaushik, vice-president, Anagram Comtrade, said.

Is the commodity run over??????

The drop in oil, gold and other raw materials since May is signaling an end to the five-year bull market in commodities as global growth slows and demand falls.

``The mega-run for commodities has run its course,'' says Stephen Roach, the New York-based chief global economist at Morgan Stanley, the world's biggest securities firm. Roach in May said the surge in oil and metals was a bubble about to pop.

Since then, the Reuters/Jefferies CRB Futures Price Index has fallen 12 percent from a record, more than enough to qualify as the first so-called correction since the rally began in 2001. The Goldman Sachs Commodity Index, after gaining for four years, has lost investors 5.1 percent in 2006. Gold and sugar already are in a bear market, defined as a price drop of 20 percent.

Commodities are plunging because of reduced growth in some of the world's largest economies. The U.S. Federal Reserve's report on economic conditions in each of its 12 districts last week indicated consumer spending rose ``slowly.''

Expansion in China, where growth of 9 percent in the past four years caused raw-material orders to surge, may be curtailed as the central bank raises interest rates and curbs lending. Some strategists remain bullish. James Gutman, senior commodities economist in London at Goldman Sachs Group Inc., the world's second-largest securities firm by market value, says the commodities losses are nothing more than ``cyclical fluctuations.

``We're certainly not at the end of the long-term bull market,'' says Gutman. ``If there are any near-term corrections, I'd view them as a buying opportunity.''

Prices Tumble
Sugar on the New York Board of Trade is down 40 percent from its February peak. Gold dropped below $600 an ounce today, its lowest in 10 weeks. Soybeans are 15 percent below their July high, and crude has lost 15 percent from its record level.

Frederic Lasserre, director of commodities research at Societe Generale SA in Paris, said a 50 percent plunge in metals prices is ``likely.'' Investor Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, agreed that a slowdown in the world economy means lower prices are ahead.

``Some industrial commodities may have peaked out for good,'' said Faber, who told investors to bail out of U.S. stocks a week before the 1987 so-called Black Monday crash. ``Grains and precious metals may continue to rise as they aren't tied to the economic cycle,'' he said in an e-mail.

Declines Accelerate
The drop in commodities gained momentum Sept. 8 with oil, gasoline, gold and copper falling. The pace of the declines may slow over the next 12 months.

That's because the global economy will expand about 5 percent in 2006, and growth next year will be ``robust,'' Masood Ahmed, a spokesman for the International Monetary Fund in Washington, said on Sept. 7.

IMF Managing Director Rodrigo de Rato said Europe and Japan will help power the economy, while the U.S. slows because of a cooling housing market and higher interest rates.

``You can certainly see the paws, but not a whole bear'' in commodities markets, said Joachim Klement, asset-allocation strategist at Zurich-based UBS AG's wealth management unit. ``We are not in a bear market yet. The long-term uptrend in commodities is still intact.''

$40 Oil Forecast
Crude oil should be at $50 a barrel now, rather than at $66, because investments by fund managers have pushed prices too high, according to Ben Dell, an analyst at Sanford C. Bernstein & Co. in New York. Standard Chartered economist Steve Brice in Dubai last week wrote that $40 crude oil is possible.

Commodities prices may slide for another nine months, said Tony Dolphin, who helps manage $125 billion at Henderson Global Investors Ltd. in London.

``A bubble scenario in commodities is still there but I expect a more controlled decline in prices,'' he said. ``The global economy hasn't built in any grave imbalances, such as the run-up in inflation in the late 1980s or the overinvestment in technology during the late 1990s, so I think the downturn will be limited.''

Optimistic Investors
Michael Lewis, head of commodity research at Deutsche Bank AG in London, points to falling world stock markets as a sign that the commodity bull market has further to go.

``If equities were posting double-digit growth, then money would fly out of commodities,'' Lewis said. ``That hasn't been the case. Commodities can still compete for capital. There's still room for prices to run.''

Morgan Stanley Capital International Inc.'s World Index, a measure for global stocks, has fallen 4 percent from its 2006 peak reached on May 9. Investments in the Goldman Sachs Commodity Index and the Dow Jones AIG Commodity Index may rise 50 percent to $150 billion by 2007 as pension funds and other money managers diversify from stocks and bonds, Sanford C. Bernstein said in an Aug. 21 report.

Some hedge fund managers say they can't take any more losses.
Ospraie Management LLC, run by Dwight Anderson, liquidated the $250 million Ospraie Point Fund that fell 29 percent in the first five months of the year, in part because of wrong-way bets against commodity prices.

MotherRock LP, the hedge fund run by former New York Mercantile Exchange President Robert ``Bo'' Collins, told investors last month he planned to shut down because of a ``terrible performance'' as natural gas prices sank. Collins didn't return messages left at his office and on his mobile telephone for comment.

Correlation between Gold and U.S. Interest Rates!!

Every time the Fed announces a decision on the US interest rates, gold prices also react. If interest rates are increased, gold prices go down, and vice-versa, indicating a negative correlation. The explanation offered is that when interest rates rise, the higher returns attract foreign capital and demand for dollars. The higher demand for dollars raises the US dollar-exchange rate. This increased return on the dollar makes gold less attractive and, hence, the gold price falls.

This theory is what is put forward by television channels and economics courses around the world. For lack of a better phrase, one may refer to the above as the "Maggi Theory of Gold", that is, the theory is valid for the first two minutes of trading after announcement of an interest rate decision. Beyond that initial speculative sentiment, the historical evidence has been quite contrary to what is suggested by the above theory.

The Evidence
1971 was when the US went off the gold standard and thus, that would be a good starting point for this analysis. In January 1971, gold prices averaged $37/ounce and interest rates were 6.24 per cent. For the next 12 years, both increased gradually. Gold averaged $673 by September 1980, while interest rates peaked a year later, at 15.32 per cent.

For the next two decades, there was a bear market in the precious metal, in conjunction with declining interest rates. Gold prices bottomed by April 2001, at $260, and interest rates bottomed out by June 2003, at 3.33 per cent. From the bottom, both have been increasing steadily and, by June 2006, gold averaged $600, and the interest rate was 5.11 per cent.

Indeed, barring very short-term time-frames, the correlation is actually a strongly positive one - higher interest rates mean higher gold prices. But why is this so?

"Real" Theory of Gold
For one, gold is not an interest-bearing instrument. So "other things being equal", any interest-bearing instrument should be preferable. It does not matter whether the interest rate is 0.5 per cent or 50 per cent - one would be worse off holding gold. So it is not the interest rate that influences gold prices, but the "other things" that is assumed to be equal.

So what are the "other things"? Let us get to the basics of investing to answer that. According to Benjamin Graham, "an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return". Most people would agree that it should at least be equal to the risk-free interest rate and a risk premium for holding a risky asset class.

But what happens when real rates of interest are negative? Then, an investment operation, even when it fits in with the above definition, would fail to maintain the purchasing power. So a more appropriate definition would be as follows: "An investment operation is one which, upon thorough analysis, promises safety of principal and a return that at least ensures maintenance of purchasing power over the period invested". Consequently, when expectations of inflation are high, investors prefer gold as a mechanism for protecting their purchasing power. Thus, when confidence in a currency is high (low inflation), then gold prices would be low and, for the same reason, interest rates also would be low. The best explanation for the gold standard was, ironically, given by the former US Fed chief, Alan Greenspan, in his speech "Gold and Economic Freedom" in 1966:

"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which the banks accept in place of tangible assets and treat as if they were an actual deposit, that is, as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets."

Of course, the Maestro managed to unlearn this virtue by the time he reached the Fed, where he began the biggest money printing exercise ever witnessed. He did exactly what he had said would happen in the absence of a gold standard.

The effects of that can be observed in the Graph that shows how chocolate prices moved before and after the era of easy money. Chocolate is just an example, but it's true of almost every other consumer good. The Fed-doctored CPI or core rate will never tell you the true story.

Gold as leading indicator
While the positive correlation between gold and interest rates is obvious, the peaks and troughs do not exactly coincide. If we plot gold vs 18-month future interest rates (that is, gold of January 1970, matched with the interest rate of July 1971), then the lines coincide almost exactly as shown in the Graph.

What this means is that the yellow metal has been a very good indicator of interest rates. Given the fact that gold has been going up sharply in the recent past, one can expect the interest rates to follow soon. In an earlier article titled "The Inflation Game" (Business Line, July 21, 2006), this writer had explained why interest rates are set to increase. The current surge in gold just goes to confirm that.

The Golden Future
An interesting exercise would be to estimate how high the precious metal would go up in the next decade of rising interest rates. In the previous interest rate cycle of 1970 to 1983, prices went from $35 to about $675 (it touched $850 for one minute) - an increase of nearly 20 times. This time around, we started from $260, so will we exceed $5,000?

One could argue that the gold price, as fixed by the US Government in 1970 at $35, was artificially low and, hence, the move appears exaggerated.

On the other hand, one could make a case that in every economic aspect - fiscal deficit, consumer debt, trade deficit, debt-to-GDP, etc - the US is much worse than it was during the 1970s and so gold could be headed for an even greater move.

A more fundamental reasoning would be that the 35-year experiment with the loose-monetary system has to end "eventually".

Subsequently, when we go back to Bretton Woods, gold would have to be priced at $30,000 to account for the dollars in circulation today. Thus, using a gold standard to define the intrinsic value of the metal, $5000 would indeed be cheap.

Whatever happened to Gold?

Crude Oil is by far, today's most essential and indispensable commodity. The world would literally come to a halt if trucks, ships and airplanes powered by oil, could not deliver essential goods.

Gold on the other hand has been, since early times, a trusted measure of currency and a safe haven for traditional investors. We are by no means "gold bugs". We are reporting facts as would relate to any other investment. For our purposes, this article will look at how these markets move relative to one another.

With growing worldwide demand for Crude Oil, prices have gone above the $75.00/barrel mark and are currently trading below $60.00. Is the price of Gold riding this wave? By understanding the gold/oil ratio we can determine how to position ourselves in the markets.

What is the Gold/Oil Ratio: The Gold/Oil ratio measures the number of barrels of oil that equate to one ounce of gold. It is calculated by dividing the price of Gold by the price of a barrel of Crude. According to researcher Adam Hamilton of the Zeal Intelligence newsletter, the Gold/Oil ratio stood at an average of 15.3:1 for the 40 year period from 1965 to 2005. The range was as high as 33 with a historical low of 6.6. Looking at the December contracts for Gold and Crude Oil as of the close on 10/9/06 that ratio stood at 9.48 ($582.80/$61.49). Again this simply means that the price of Gold is 9.48 times the price of Oil.

With growing worldwide demand for Crude Oil, prices have gone above the $75.00/barrel mark and are currently trading below $60.00. Is the price of Gold riding this wave? By understanding the gold/oil ratio we can determine how to position ourselves in the markets.

This suggests that prices will eventually realign to a "fair mean". In this instance Gold should move higher unless, of course gigantic new deposits of oil are discovered and find their way to the marketplace rapidly - which is quite unlikely - causing the price of Crude Oil to drop.

In the late 1970s, Gold lagged oil eventually rallying up with to hit its all time highs of $850. Today, the scenario appears poised to repeat itself, however keep in mind that past performance is not indicative of future results. Even when Dec. Crude oil moved up to $76.90 on May 12, 2006, Dec. Gold went to $753.00 bringing the ratio to approximately 9.79:1. Based on the historical average of 15:1, Gold still appears undervalued relative to crude oil. Another factor affecting the price of Gold is the fact that the US Dollar has been trending higher as of late and the correlation between these two markets is negative, meaning that they have a tendency to go in opposite directions.

What will it take for Gold to get back to its historical ratio of 15:1?
Let's examine world events that could contribute to higher Gold prices:

• OPEC announced a 1 million barrels/day cut with the intention of maintaining Crude prices above $55.00/barrel; Demand for Crude oil prices is still growing due to expanding economies in Asia, notably China and India; Alternative fuels, though readily available, are years away from mass distribution; Energy efficiency has improved however demand continues to grow;
• N. Korea successfully accomplished a nuclear test and could potentially become a threat to peace in the region; Slowing real estate markets in the US along with growing consumer debt (up $4.99 billion in August according to the Federal Reserve) may cause the consumer-driven US economy to take a hit;
• China's central bank announced its intention to double its Gold reserves after already doubling them to 600 tons. If China were to increase its reserves to only 5% of its foreign exchange holdings, it would have to purchase an additional 1900 tons of Gold making it the 5th largest holder behind the U.S., Germany, the International Monetary Fund and France;
• The Financial Times reported that Germany's Bundesbank will halt its sale of gold reserves for the third year and other central banks worldwide have followed suit while others have beefed-up purchases;
• FT also reports that Italy and Ireland have not sold any gold in the past two years;
• Worldwide concerns over the US Dollar has many central banks alarmed over the currency risk associated with holding the Greenback;
• Russia, Argentina, South Africa, the UAE and several others are adding Gold to their portfolio as a way to offset their risk exposure in the US Dollar;
• The growing national debt in the US (the largest in the history of the world) is sending a message of unease to world economies who are fully aware that their economical welfare is highly dependent on a healthy US economy;

What To Do?
Looking at the chart above, we can see that Gold is clearly not in a bullish stance. Each time Gold has tried to go back up, it's made lower highs followed by lower lows; far from a bullish sign. We can see that since it made its high in May 2006, Gold has retraced back nearly 25%. Short term resistance is at $600 with longer-term is at $630. Support is at $555 and if broken could signal an extended down-trend. Although I am long term bullish on Gold for all the reasons listed above and more,

I believe that we'll see Gold trading in a range well into November at which time, growing demand should push prices back to the highs made in May of this year. In my opinion for the time being, it would be wise to be patient, look for an entry point once prices have established a clear uptrend and proceed cautiously when that time comes. This market carries a lot of risk and daily swings can be gut-wrenching.

Gold:On the move again By Chad Butler

After a brief hiatus, Gold is returning to my radar screen. With downside momentum in check and a successful hold of previous support, Gold may make that push to make a strong finish to this year. How can a trader take advantage of this market?

I find that a longer term focus using a trend following methodology works best for me. Ultimately, I use the 9 day simple moving average to tell me what the short term money pressure is on the market, and I look at the 50 day moving average to tell me what the long term money pressure is. If the 9MA is above the 50MA, the market is in a bullish stance, and I would look for buy entries. If the 9MA is below the 50MA, the market is bearish and I would be looking for an opportunity to sell.

Currently in Gold, the 9MA is about to move above the 50MA, indicating that we should be looking for buy entries. This is reinforced by the MACD. I use a 9/50 compression on the MACD to complement my use of the 9MA and the 50MA. In late October, we saw a MACD cross, indicating a shift of momentum to the upside.

The conservative trader should wait for a day in which the 9MA settles above the 50MA prior to entering the market. A more aggressive trader could be looking for entries now. But what are the possible trades?

When using the trend following methods that I use, I caution not to use the technical indicators (the moving averages or the MACD) as both a screening tool AND an entry tool. Rather, I prefer to use price action to determine specific entries and exits. The most conservative entry is to buy a breakout of resistance. In the case of Gold, round numbers are key psychological barriers and therefore make good points to watch for breakouts - 620, 630, 640 will be key. Also, a breakout above previous resistance is a good entry. The market is breaking out today, the next preciously tested resistance level would be the 648.50 level. I find 620 to be significant as well as it has been a previous area of support.

For more precision, one could wait for a setup using the 20 day exponential moving average. This trade setup occurs when the market pulls back and settles below the 20 day exponential moving average, then makes an attempt to regain the high of the day that settled below that level. The textbook trade is to buy the open of the following day. However, traders employing this technique are cautioned to wait for confirmation that we are in an uptrending market ( i.e. the 9MA has crossed the 50MA).

Alternatively, more conservative traders could employ option spreads in Gold. An option spread, such as a bull call spread, gives a trader the opportunity to participate in the market with a limited risk position (the risk on a bull call spread is limited to the cost of the position). The advantage to using a spread like this, as opposed to buying a call option outright, is that for similar cost, a trader can often get a position that is closer to the actual market price. The tradeoff in this trade is that the upside potential is capped at a maximum amount (the difference between the strikes).

Here is an example. A trader would purchase a 640 call February 2007 gold while simultaneously selling the 680 call. The 640 call currently has a theoretical value of approximately $1800. The 680 has a theoretical value of about $880. To construct a bull call spread, the trader buys the 640 call for $1800 and sells the 680 call for $880. The difference is $920. That is the net cost of the position and the maximum that the trader can lose on the trade.

But how much can he make? If Gold is trading at or above 680 at expiration (85 days from now), the position would be worth the difference between the strike prices. This is $4000. Take away the $920 that the position cost and the maximum net possible gain would be $3080. This is approximately a 1:3 net risk:reward ratio (1:4 gross). When constructing option spreads, I find this to be a reasonable number and I seek out trades that are at least 1:3 risk versus reward.

But what about the outright call positions? Well, for the same money as our spread trader, a trader would have to go to the 675 call in February 2007. The current theoretical value is approximately $966. But for that to be a better trade, Gold would need to be trading above 684.66 at expiration just for us to break even (675 strike + 9.66 paid for the call). To beat the call spread, we would need to be at $715.46. Now, if we were expecting gold to be trading well above that, the outright call would be our preference. But the call spread gives us a good look at the upside while keeping us in a limited risk position.

Certainly, for the trader willing to take the risk, the outright futures are trade to take. You get a 1:1 look at the market, while the market will have to make significant strides for the outright call or the call spread to benefit. But risk has to be considered with that. Traders looking to get long on either a breakout move, or on a 20EMA setup, a stop at key support would be necessary. For me, this is the 565 area. I would want my stop to be somewhere outside of that area, looking at 560. If the market clears and settles above the previously outlined resistance areas, the stop could be trailed behind accordingly.

I have outlined some broad trading examples here to take advantage of a building uptrend in Gold. But there are some caveats. First, if you do not understand the risks of any of these trades (or any trade for that matter), you are advised to do nothing until you fully understand and are comfortable with the risks. Second, these are some broad examples. They are geared to more intermediate to advanced traders that can work them into an already sound trading plan. If you lack a sound plan and the discipline to execute it, you would be wise to discuss a plan with a market professional prior to taking any action.