GOLDReport
August 21, 2007
I am writing this report much earlier than normal as I will be on vacation starting late tomorrow and didn't want to write a Metal Report while on vacation. As gold looks to me like the play to be in, I want to focus on gold only in this report. In my next Metals Report, the one I will write on August 30th, I will again begin covering silver as well.
The capital markets are stable…or are they? I doubt that many are looking at what is going on in the shorter term interest rate market, but yields there are dropping like a rock. I continue to hear from my sources of reports that firms needing to sell commercial paper can't sell the paper at rates they consider even remotely reasonable. While CNBC is saying things are fine, I am suspect.
The commercial paper market is, was or remains shaky at best. Take your choice. The Fed cutting the Discount Rate was a move to provide steadiness to this sector. Injecting billions into the banking system, via "Repo's" is also working. In fact both events are working to a degree and both probably will need constant massaging to keep things moving along. If conditions warrant, the Fed may cut the Discount Rate again or lengthen the buy back period from the current 30-day period to an even longer one. Mr. Bernanke still has some tricks that he can pull out of his hat, without a Fed Fund cut.
However, the marketplace believes that the Fed Fund Rate is going to be cut, and very soon at that. In fact, many think the cut will take place on or before September 18th, which if I'm correct is the date of the next regularly scheduled FOMC Meeting. If the Fed does drop the Fed Fund Rate, interest rates that you and I pay will be affected. I believe the Fed will only cut the Fed Fund Rate if the Fed decides that inflation is no longer a worry or if marketplace pressures become so severe as to force the Fed to move. Just a few weeks ago, yes weeks ago not months ago, Mr. Bernanke said the threat was still inflation. Can Fed policy change this fast, or better yet, should it?
Only time will tell. Each day that goes by seems to bring forth new issues, but ones that don't seem to have as severe an impact as last week's events.
If the Fed moves to add more liquidity to the marketplace, I think this will be interpreted over time to be inflationary. If so, inflation should lead to higher commodity prices. However, as we just saw, when credit becomes so tight that firms cannot do business, the lack of credit causes deflation. Immediate deflation in severe cases! Just look at the markets that broke last week to see how much they broke and to see how the lack of credit affects the financial markets, when Commercial Firms can't find financing.
It all boils down to this. If you can't purchase or pay for things do to a lack of credit, any supply of the good or services you need want or need to buy becomes an oversupply, assuming no one else can buy it. At least momentarily. Once credit frees up, goods go up in value because of pent up demand and the ability to back up that demand by paying for those goods or services.
As usual, my comments are simplistic in an overly complicated world. They are meant to be.
Before I get back to the business of discussing gold and silver, I want to point out that I am now recording Mid-Day Video's on gold and silver along with stock indices.
Below is the link to these videos, and yes, soon there will be RSS feeds to alert you as to when they are ready to view. Well tell you more about RSS Feeds soon.
http://www.iepstein.com/videos_start.aspx
As I will be on vacation until August 29th, tomorrow will be the last postings of these until I return.
Charts, especially historic ones are a road map of both what's occurred and when the occurrence took place. Seasonal Charts don't "tell" us what is going to happen or which events will cause things to happen, they simply point out tendencies, just like just like the hurricane season. You know when the hurricane season starts to expect a hurricane. You just don't know when it will show up or where it's going. You in fact don't even know if one will show. However, how many hurricane seasons go by without a hurricane? Get the point?
Seasonal charts, no matter how convincing they look cannot and do not guarantee what will take place in the future. Seasonal studies are an important tool, but one with limitations as no one knows the future or how future events will unfold.
Keeping this in mind, let's look at the chart below that comes by way of the
As the end of August approaches, gold historically begins to trend higher in price. Over the past few days we haven't yet seen this occurrence, but I am keeping a watchful eye out for it to begin.
December Gold
As mentioned above, short term interest rates have collapsed. From near the high 4's just a few days ago, to down near 3 percent today, for 90-Day T-bills. Given the state of flux the world markets are in, I question whether a 3 percent return is attractive enough to put money into. If not, where do you store your money? For some, gold may soon look to be the investment of choice. If so, investors will quickly get on the gold bandwagon.
Let's look at a chart of December Gold, through early evening trading today, August 21.
The above chart spells it all out. Prices are narrowing in, like an "arrowhead". Yes, the Seasonal Chart at the beginning of this report points to history in which gold has moved higher in September. However, until the market either confirms or breaks out to the upside, we don't know that it will follow what has often occurred in the past.
Therefore, I want to play this market with caution.
Given the financial events taking place around the world, if investors decide to "park" their assets, the place to park it may become gold. However, given the same events, what if the same investors decide to park their funds in the US Dollar, as they just did? What will gold do?
Conclusion and Recommendation
Given the slowdown expected to hit the US economy in coming quarters, I expect tht gold will attempt to breakout to the upside, soon. China's economy hasn't slowed down, nor that of India. In fact, given the state of things I'm not even sure what "slowdown" means if the Fed floods our market with liquidity. Won't that spur on spending? Isn't that what's intended?
My recommendation has been to slowly build a position in gold, using Gold Call Option Spreads to limit risk in case my analysis proves wrong. Yes, I may be wrong.
Over the past two weeks I have recommended to establish a Gold Call Option position. Gold broke down hard enough within the past week for readers of this report to put some Call Spreads on, at what I think were favorable prices.
Let's review again why in markets like we’re in, I think Gold Option Call Spread Strategies make sense. It all boils down to this, this strategy allows traders to build a long position in Gold, using time and price.
- Call Spreads, if put on and taken off together, aid in limiting dollar risk
- Your risk is limited to the amount you pay plus commission and fees
At the end of the day, the key is in being right that prices will move up in the September-October time frame.
If my analysis proves wrong, the most you can lose is what you paid for the Spreads including fees and commission. However, you can cut your loss to a degree, by getting out well before Option Expiration if an uptrend does not develop. Option expiration is currently a couple of months away. If I am right about the market direction, the spreads will take care of themselves as shown on the graph below.
Point: By now regular readers of my Metal Report that elected to put on a base position, should have that position established. If not, we've updated the Spreads Matrix below, with the help of Mark Pesek, one of my IECo brokers.
The above spreads take into account a commission of $50 per option plus applicable NFA, Exchange, Floor Brokerage and order transaction fees
These strategies above were complied using data on August 21, 2007. While the bids and offers will change, the overall strategy doesn't change. The matrix shows what could theoretically be made if prices advance as I expect them to. The maximum loss is what you pay for the spread. Do not initiate or take the spread of a "leg at a time". Put it on and take it off as one order and one event.
To discuss these strategies in more detail, 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
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