Ira Epstein's Metal Report

Source: Ira Epstein††(10/11/07)

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.


Now that the US Elections are over, what next for Gold and Silver


 

10-11-2007

 

Let me remind those who follow this report that I now record and publish two Mid-Day Videoís: 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.

 

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Subprime issues and the break in the US DollarÖÖ.

 

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 todayís 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 Eurosí, 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 doesnít mean we wonít get the usual October slump. I simply donít know. What I think should be done is some ďnibblingĒ 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 ďmeasure market price momentumĒ.

 

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.

 

Thereís always the chance that gold will not back off significantly. Historical charts have limitations. They canít 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. Decemberís do not.

 

Scenario One:

 

Letsí 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 monthís 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

 

Letís assume Gold doesnít back off. By entering now you are in place to catch the move, assuming again that gold does move up, into year end.

 

Itís very important to remember that neither of these scenarios will work if gold doesnít 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 wonít pan out, Iíll recommend liquidating it and taking whatever is left and moves you onto your next trade. But letís not get ahead of ourselves. Iím recommending this strategy because I expect the market to rally.


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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 goldís 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, donít 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 isnít all that great in terms as to how time affects price.

 

 

The above Matrixís were made with help from one of IECoís 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:

 

mailto:MarkP@iepstein.com

 


 

 

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. Information is taken from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Ira Epstein & Company or Shatkin Arbor, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are no indication of future performance.

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