GOLDReport
October 25, 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
Write Downs and the Housing Market...
It is now "come clean time". Yep, come clean time.
Merrill Lynch yesterday announced they were writing down $7.9 Billion Dollars in collateralized debt obligations and subprime mortgages. While a write off was expected, the sheer magnitude of nearly $8 being lost sent ripples through the financial community. My guess is that those in the know realize that "other shoes" are about to fall.
Merrill is the leader in doing a write off of this magnitude. Many institutions will follow, both here in the USA and abroad. Those with loses know that this is the way to get rid of this issue. The institutions problem now is one of confronting the issue and swallowing the medicine. It's a hard pill to swallow, but one that needs to be done. If anything, I'd like to see the losses declared by these that do declare to be a bit overstated, so that this whole issue doesn't resurface. Let's get it behind us.
It was announced today that the median price of homes fell 4% in September. Like the futures markets, homes that were priced well beyond their worth are falling in value. The quicker the break, the sooner a bottom will come into play. Those familiar with trading should use their trading experience to understand that homes in price bubbles are no different than wheat prices at $10 a bushel. You need both, but at what price? Once buyers pull back off or too much supply comes to market, prices break.
Countrywide Mortgage got smart. They realize that a paying tenant is better than no tenant. It appears that they are aggressively courting those with ARM mortgages that reset at absurdly high rates with a workout plan. In essence a lower mortgage rate than the new rest one. It's a plan to keep them in their homes and paying their mortgages. Good move on Countrywide's part as selling the homes only creates a bigger loss in this market.
Another interesting event was Congress's realizing that to label Turkey with genocide action right now, is nothing short of being crazy. Expect that issue to be off Congresses agenda for a long time.
Last, the chess game between Russia, Iran and the West goes on. Today the US labeled certain Iran Banks as part of a terrorist group and ordered their assets frozen. I seriously doubt these funds are at risk. However, what this does so is allow our allies from allowing funds to go through their banking system. The "heat" is about to pick up. My guess is that Russia is using Iran as a pawn in the missile defense system the US wants to place in Europe. The rhetoric was very strong today. The strongest in a very long time.
February Gold
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 price momentum".
Historically speaking, gold prices often begin to rally in November. What's most interesting is that the October price break hasn't occurred. Rather, prices have gone sideways, which leads me to believe a bullish setup is in place going into November and December, one they you need to position yourself for if you believe that past history repeats.
For the past two weeks I've made mention that I was getting the impression that gold may not back off significantly. It hasn't. Now the big event on the horizon is next week's Fed Open Market Committee Meeting, the FOMC meeting.
The Fed has new ammunition for a rate cut. The meltdown in new homes sales, the loss of home values and the write offs that financial firms now beginning to take will come into play. As this is the last formal FOMC meeting prior to Christmas, I can't think of a better gift to spur Christmas sales on than a quarter point rate cut.
So this brings us to the point of trying to anticipate what happens with a cut and what happens without one.
If the Fed cuts the Fed Fund Rate by a quarter point my guess is that the cut will cause a further break in the value of the Dollar and a rally in the stock markets which in turn should cause gold to rise.
I doubt there will be another 1/2 point rate cut, but if there were, the reaction would simply result in a sharper break in the Dollar, stronger rally in stocks and a sharp drop in interest rates. This would impact new home sales very positively.
No Fed Fund Rate cut may initially support the Dollar, causing a short rally. I would want to sell the Dollar on that rally. My guess is that this action will immediately hurt stock market values, prolong the housing crisis and end up being blamed as the cause of bad Christmas sales, should Christmas sales fall short of retailers expectations.
Therefore, being pragmatic, I believe the Fed has little to lose and lots to gain by going forward with another rate cut. The US made it through the G-7 Meeting with little talk about the falling value of the Dollar. As long as our economy keeps moving along, eventually the economic cycle will turn back and favor us. I see the Fed as in would rather worry about inflation than recession.
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Conclusion and Recommendation
The big question facing you is what to do in front of October's FOMC Meeting.
As you know, couple of weeks ago I put out a recommendation to build a "small core position" in February Gold Calls, as their expiration date is January 28th, which provides you with plenty of time to maneuver about.
Those that followed my recommendation now own the February 760-780 Gold Call Spread at 8.00. It closed today at $9.50.
My recommendation is to add another unit at 8.50 if given the opportunity.
Your total dollar commitment is limited to you cost, currently $800 plus whatever commissions and fees you paid and yes, my intent is for you to go through the FOMC Meeting with this position.
Silver
I've been pointing in over the past month and a half that silver was going to remain weaker than gold. In fact, the most I hoped for was that silver would not break very hard. My analysis was pretty accurate.
As I see it, silver's fate to a large degree depends on the state of the housing market and what gold does. Given the pickup in negative rhetoric between the US, Russia and Iran, along with rising energy prices I think the downtrend in silver has ended for the time being.
Let's look at the seasonal chart of silver below.
As you can see, silver historically bottoms out at the end of October. That fits into the current time frame. What bother me however is that the FOMC Meeting takes place right at month's end. Should the Fed not cut the Fed Fund Rate, it's possible one more nose dive is in store.
Now look at the chart of March Silver below. I believe it came out of its downtrend today. Therefore, I am now bullish and will use recommend using pullbacks as buying opportunities.
Recommendation
I believe the most conservative way to approach this market, given the exposure of the FOMC month end meeting is buy a March Silver Call Spread.
With the help of one of my broker's, Mark Pesek, we created the following table.
My recommendation is to enter the 14.00-14.50 March Silver Call Spread at $8.10.
I have no intent of risking the full $810 you pay plus commission, exchange, NFA and transmission fees. What I intent on doing is recommending you build a core position now. After the FOMC Meeting we will decide on the next course of action.
Given the amount of time premium in this spread, unless something dramatic occurs to negatively affect silver, I think we have plenty of "wiggle" room to play with. In any case, should silver fall dramatically in price, your total risk is limited to the price you pay for the spread plus commission and other fees.
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 ECo RepresentativeI 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:
Definitions of Initial Dollar Risk:
Low-Risk Definition:
A Low Risk Trade is defined as one having an approximate initial dollar risk of $0 to 150.
Medium-Risk Trades Are Broken Down Into 3 Categories:
Lower-Medium Risk:
A Lower-Medium Risk Trade is defined as one having an approximate initial dollar risk of $151 to $250.
Medium-Risk Trade
A Medium-Risk Trade is defined as one having an approximate initial dollar risk of $250 to $350.
Higher-Medium Risk Trade
A Higher-Medium Risk Trade is defined as one having an approximate initial dollar risk of $351 to $500.
High-Risk Trades
A High-Risk Trade is defined as one having an approximate initial dollar risk of $500 to $600.
All dollar-risks are calculated with no allowance for slippage of fills, gaps in the market and commissions.
Recommendation
What I intend on doing is waiting to see if 13.92 is hit. If so, on a pullback I will look to buy the December Futures Contract at 13.68, risking that trade to 13.595. My short term objective, assuming prices hit 13.92 is 14.12, which was the high made on October 15th.
An alternative to this strategy will be to employ a Long Call Silver Spread. If I do so, I will not use the December Contract. I will options related to March Silver Contract.
Rather than set the Call strategy up now, I prefer to wait and see if the futures first trigger a buy signal. If so, I will offer up a Call Strategy.
I will as usual keep those who get my Twice Daily Market Reports in the loop as to my thoughts.
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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 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.