Gold just had its best week in 7 months. Here’s why Mike Khouw is buying more

Gold jumped roughly 7% last week, logging its best weekly gain since January, driven by a weaker U.S. dollar, falling Treasury yields, and an unexpected contraction in employment data that reduced fears of aggressive Federal Reserve rate hikes.

(Note: the employment data wasn't that bad; layoffs were low, private employment climbed by 30,000, and the data was negatively skewed by the seasonal effect of ~50k fewer government education jobs)Â

For the moment, gold remains below the 150-day moving average; the more leveraged way to play it — the gold miner ETFs GDX and GDXJ — are bumping up against it.

The key indicator is that Newmont Mining, the largest constituent of the gold miners, has broken through the 150-day moving average. To me, that suggests the others (GDX and GLD) will soon follow.

From an options traders perspective, gold has a more symmetric "Volatility Smile" - meaning out-of-the-money calls have higher "implied volatility" than at-the-money calls do, which improves the payoff of a long call spread (debit spread) relative to a similar option strategy in the S&P 500.

For example, a November 400/460 call spread in SPDR Gold Shares (GLD) would cost about $16.15, just over 25% of the difference between the strikes (a total of $1,615 as each contract represents 100 shares), providing an upside payoff of almost 3:1 if GLD should rally another 15% over the next 100 days.