8-9-2007

Metal markets broke very hard today. The French Bank, BNP Paribas, reported today that three funds it controls were in financial straits, due to a lack of liquidity. These three funds apparently invested in Subprime Loans. The European Central Bank acted immediately on news of this by pumping liquidity in the system to calm the markets worry. However, once the announcement was made the damage was done. Stock, currency and metal markets reacted immediately, with most breaking sharply. In major currency trade, only the Yen and Dollar held up today. The Dow Jones Index broke nearly 400 points while gold and silver washed out to the downside.

Another casualty of the Subprime mess has to do with the Libor Rate. The Libor Rate is the rate banks charge each other to borrow money. It rose today. I heard CNBC report that banks rose their Libor Rates by nearly 1 ½ points. To me this means banks want to keep their funds on hand for liquidity purposes and don’t want to lend out their excess reserve.

The September Fed Fund Rate Futures ended today pointing to a 100% chance that the Fed will lower interest rates in September. This shows what a one-day washout can create and points out the issues the Subprime fallout has put into the financial markets.

In last week’s Metal Report I pointed out that one way to approach gold and silver as from a seasonal basis. Historically, both are due to turn up later in late August. Today’s price break fits right in with this historical seasonal scenario.

I did my best last week to prepare readers of this report by recording a video about what I expect late August and September to hold in store for gold and silver. In that video I review in detail the seasonal influence gold and silver have displayed over the past 33-40 years. I strongly recommend you view it.

If you are reading this report online, simply click on the following link. If not, type the following link into your web browser.

http://www.iepstein.com/dailyVids/metals/MetalUpdate8_1_2007.html

In last week’s report I stated that neither gold nor silver were in a buying mode, if you traded them using futures contracts. In my twice daily market commentaries, I never issued a buy signal since these markets had not set one up according to the way I teach trading.

What I did recommend last week was that those that wanted to build a long position in gold or silver consider using Call Spreads. With today’s price break, the opportunity to begin doing so is in gold, not silver, is at hand. I don’t recommend you put all of your position on at once. Rather use this price washout to build your Call position.

Options trade different than futures. Call Option Spreads have different characteristics than futures do. Options allow you to slow the game down. They allow you to structure your risk and profit objectives, creating in essence a game plan if you believe that the trend will soon turn up and you want to build a position in advance of this occurring.

The “obvious” key is for the strategies discussed below center on the seasonal tendency of gold and silver to rally in the fall. If that doesn’t occur, this strategy will fail. If the trend does turn up, the extent of the rally will determine the final profit. It’s really that simple.

Let’s look at the Seasonal Charts below:

As you can see, at the beginning of August, about where we are now, prices in both gold and silver tend to break. In fact, after a short rebound they can break again later in the month. How far they can break is an issue that I will discuss below.

It is very important that you understand that past history does not guarantee what will take place in the future! In fact I don’t use Seasonal Charts by themselves to make trading decisions and don’t recommend you do so either. My recommendation is that Seasonal Charts be used in combination with other factors, including but not limited to: market timing, risk analysis, moving average analysis, general economic market conditions, whether the market is in an overbought or oversold condition and last, whether or not the market is trending.

History plays a role in market analysis, but that role is limited to looking back at  what previously occurred. It is crucial that you understand that past history does not in any manner guarantee what will take place in the future and is but another trading tool to look at when plotting out a trading strategy.

December Gold

Let’s look at a chart of December Gold. However, this week this contract using what is called an “Area Chart”. An Area Chart is basically a chart that plots ranges using the days high, leaving on the chart a “positive” and “negative” area. The area up to where a high price occurred is colored in gold on this chart. The area above the high is colored in black.

On this chart I have labeled the already established monthly lows of June and July. This is a process you should go through if you are going to work with Seasonal Charts.

In the first section of this report I displayed a Seasonal Gold Chart. It shows that the market has a historical pattern of higher lows in terms of pricing both July and August. Prices historically have moved higher in September and October from June’s low point.

What this chart tells me is that unless and until prices in December Gold Futures take out the July low of 659, that the Historical Seasonal Chart Pattern in Gold is continuing to work as it did in the past.

Conclusion and Recommendation

For traders that like using option strategies to build a long position in Gold, I think the time and prices are at hand to do so. Mark Pesek, one of my fellow IECo brokers put together the following Gold Option Call Spread Table. The dollar risk is limited to the price you pay for these spreads plus commissions and fees.

My idea in using Call Spreads now, even thought the futures market trend in gold has not yet turned up, are:

·         Call Spreads if put on and taken off together help in limiting dollar risk

·         By establishing them as the market moves higher, market timing is not a crucial as when using futures contracts

·         If traders realize they want to be “early” in establishing a position, Call Spreads offer some flexibility

Here are some ideas that Mark came up with:

The above spreads take into account a commission of $50 per option plus applicable NFA, Exchange, Floor Brokerage and order transaction fees

These strategies were complied using data on August 9, 2007. While the bids and offers will change, the overall strategy doesn’t change. 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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September Silver

Unlike gold, silver often breaks the July low and often even the June low in August. In other words the trend doesn’t historically start picking up steam until later in August. Today’s price break, while not yet under the lows of July at 12.635, certainly looks on track to do so.

The financial markets are very concerned about a general economic slowdown. Copper prices have broken hard the past couple of days. Silver futures are following that pattern today. Therefore I am not yet overly eager here to enter Silver Call Spreads. However, I do think that hard breaks should be used to scale down entry in them.

Let’s look at a chart of December Silver, using the same type of chart, an Area Chart, as used in the gold section above. (Note: These charts were created using our OST-IraChart Software, which we provide FREE of charge and include  live Globex, e-Cbot and ICE-Nymex data. You are invited to test our chart and order entry products using live streaming data on most of the major futures markets. Our New Investors Kit includes this software.)

Unlike last week, there is a lot of fear in the financial markets. Fear of a slowdown and fear of more fallout from the Subprime Loan issues. Now that Subprime issues have moved abroad, the market using ‘herd mentality”. This is causing wholesale selling of metal market futures. In other words, a washout! Once completed, we will be able to better ascertain market support.

Stock indices are sharply lower today. However, even with this break, prices are nowhere near Monday’s lows.

Therefore, the Metal Markets are weak on their own accord. Gold and silver as “safe haven” investments are clearly out of favor at this point in time. I expect that to change once this leg of the washout ends. I look for gold to strengthen before silver does.

Given the history of this market and today’s large break, I continue as I did last week to recommend that those who want to get into the long side of silver wait until later in August to do so. Silver historically tends to break in early August. It seems to be following its historical path. Let is do so. We’ll be patient and try to jump on board with Call Option Strategies once this washout ends.

Recommendation

Mark Pesek prepared the table below for those that want to build a Call Option Position using the December Futures as the basis the position.

The above spreads take into account a commission of $50 per option plus applicable NFA, Exchange, Floor Brokerage and order transaction fees

These strategies were complied using data on August 1, 2007. While the bids and offers will change, the overall strategy doesn’t change. 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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