10-11-2007
Let
me remind those who follow this report that I now record and publish two Mid-Day
Video’s: One on Gold and Silver along with one on Stock Indices. These are in
addition to the in-depth nightly video I record that covers charts and my market
opinion on all the major futures markets.
The
link to my Mid-Day Videos is below. Be sure to click on the RSS feed to know
when a new video is posted. I do my best to record and get these posted by 1:00
P.M. CST.
http://www.iepstein.com/videos_start.aspx
Subprime
issues and the break in the US Dollar…….
The
Dollar is breaking down. Crude Oil is now over $83 a barrel, interest rate
futures are in a downtrend and the Subprime issues are ongoing.
The
perfect storm I have been alluding to is upon us.
I
was hoping for more of a price break. Using the seasonal charts provided by
Moore Research Center, I was looking for a point to again begin buying Gold
Call Spreads. In doing so, I have decided to alter my plan somewhat and wish to
become a bit more aggressive. However, the metal markets are overbought, so
while I will be recommending some Option Spreads, I recommend you put on a
small core position, using price breaks to add to your position. The reason is
that I may be too early on my entry point, as late October is the ideal entry
time. However, current market conditions have me concerned about being left
behind.
If
you read today’s Wall Street Journal, the Subprime story is very scary. Many people
may have thought that only lower income people were at risk in the Subprime
market. Not true. Many wealthy and upper middle class people will soon find
themselves at risk as these types of loans were one of the primary tools
heavily used to both speculate on a booming housing market and were used by
some to purchase much more expensive homes than they could otherwise afford.
With home values falling in most regions, a time bomb of sorts will be felt as
many adjustable and teaser rate mortgages reset over the next 14-months or so, at
much higher interest rate levels. In many cases, investors and home owners may simply
move out in the middle of the night. Expect lots of stories about this to be
regular reported on in the press.
I
mention this because it is a story that will not go away. It will effect
economic data going forward and will most likely cause in part the Fed to
tinker with the idea of lower interest rates. Hence, the lower Dollar.
The
Canadian Dollar is now over $1 to the US Dollar. Parity. The Aussie is closing
in quickly on the $1 level.
As
the Dollar falls, demand from abroad for US goods and investment in the US will
pick up. Americans may soon be buying American made goods as some items from
abroad are getting very expensive. In terms of investment, I wonder how many
Europeans are investing in US companies via our stock market. They have the
strong Euros’, Pounds and the like to do so at a discount. Even the Canadians
will soon have a heyday, buying US Stocks at a relative bargain price due to
the falling US Dollar.
This
is not being lost on Gold. Gold is being bid up, even in the face of intent by
many Central Banks around the world to sell their maximum Gold allotments in
2008.
This
bull market has moved up a bit quicker than I thought it would. This doesn’t
mean we won’t get the usual October slump. I simply don’t know. What I think
should be done is some “nibbling” to become involved, done in a way that is not
overly aggressive. The key is to save some funds to use to enter on a break,
should the October slump occur.
The
Seasonal Chart below was provided by the Moore
Research Center, Inc.
The
Gold Seasonal Chart shown above is one of the tools I use to “measure market
price momentum”.
Historically
speaking, momentum does two things in October. In early October, where we
are right now, price momentum often peaks. Once momentum peaks, it drops
down until late October or early November where it regains upside momentum. The
upside momentum, gains traction and has historically extended itself into late
December. I suggest you keep this in mind and use it in your planning strategy.
There’s
always the chance that gold will not back off significantly. Historical charts
have limitations. They can’t see into the future. Given this my recommendation,
should you decide to follow my recommendation, is to enter into a Call Spread
now. I am recommending February Call Options on Futures Contracts as they provide
you with enough time to get your positions into to the late December time.
December’s do not.
Scenario One:
Lets’
assume that gold peaks out right now, near the current February Gold Future
price of $763. If so, whatever strategy you enter into may require you to hold
on until the next up cycle comes along, assuming it comes along. As the
Seasonal Chart shows, the next up cycle typically arrives at month’s end. If you
decide to enter now, be sure to keep enough reserves on hand to average your
position. This would be done by doubling up when you see a turn up in market
momentum.
Scenario Two
Let’s
assume Gold doesn’t back off. By entering now you are in place to catch the
move, assuming again that gold does move up, into year end.
It’s
very important to remember that neither of these scenarios will work if gold
doesn’t rally into year end. The strategies I am recommending rely on this to
occur. If wrong, your total loss would be limited to the price you pay for the
Option Spread plus fees and commissions.
My
reason for using February Gold Options is that you are purchasing a lot of
time, time which provides you with maneuverability. Down the road if the trade looks
like it won’t pan out, I’ll recommend liquidating it and taking whatever is
left and moves you onto your next trade. But let’s not get ahead of ourselves.
I’m recommending this strategy because I expect the market to rally.
If you
haven’t had a FREE 4-Week Trial to
our Twice Daily Market Recommendations and access to our nightly videos where
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Look
at the matrix below. It is comprised of February Gold Calls.
The
first Matrix was created today using a last price in February Gold price of
$763.20.
I
recommend entering the long February 760 Call and shorting the February 780
Call at a difference of $8.60 or less. Your total dollar commitment is limited
to $860 plus whatever commissions and fees you pay. I have included a higher
commission in this calculation for those of you that use Broker Assisted
Accounts.
I believe
a risk of $860 over the next few months; given the gold’s potential to rally is
a reasonable bet. My year end target now is near $800. That will change over
time, given this is early October. However, I see no reason not to not remain
long-term bullish.
Assuming
you are a multiple position trade, don’t put your normal position size on. If past
history proves correct, we are a bit early. Have ammunition ready should a
price break of size develop. I want you to be able to add another unit.
In
the example below, I projected, using the OST-IraChart Option Calculator we
make available, what would happen if February Gold Futures fell back to $750 in
the next day or so. It provides you with an idea of how prices would move. As
you can see, given a $13 drop in February Gold Futures, our options calculator
projects a loss in value of approximately $1.30. This small drop is in part due
to these options having lots of time value built in. As time goes by, each day
will have more impact on pricing. However, right now there is plenty of time
left and the daily impact isn’t all that great in terms as to how time affects
price.
The
above Matrix’s were made with help from one of IECo’s brokers, Mark Pasek.
To
discuss these Gold Call Strategies in more detail, either call your IECo Representative or Mark Pesek.
Mark
can be reached at:
1-800-284-1065
If
you wish to e-mail Mark you may do so by writing him at:
I
believe we should stay focused on Gold this week, not silver. I will resume
writing on Silver next week.
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Disclaimer: This publication is strictly the opinion of its writer and
is intended solely for informative purposes and is not to be construed, under
any circumstances, by implication or otherwise, as an offer to sell or a
solicitation to buy or trade in any commodities or securities herein named.
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