8-16-2007

As I began writing this weeks’ report, which I am doing after 1:00 P.M. CST, I noticed that last Thursday the market broke hard also. Metals did so again today. I hope this does not become a regular Thursday event.

I will not cover in this report an analysis of Silver, as I am buried in market action and silver shouldn’t be ready until for entry until late August.

Credit issues and the unwinding of Carry Trades are the theme of the day. These two issues are at the heart of the unwinding in metal markets. The unwinding of Carry Trades today caused the Yen to soar 300-points and the Australian Dollar to fall 400 points. The US Dollar held steady against the European currencies.  

The world is not ending! However, “easy to borrow money” is for the time being…a thing of the past.

You will read or view on TV opinions of what the Fed should and shouldn’t do. The reason you and I aren’t running the Fed is because we don’t have the skills to do so. Supposedly those on the Fed Committee do. Instead of worrying about one day or one week events, the Fed must deal with longer time frames. Yes, Mr. Bernanke is new and being tested. Time will tell if he is handling this event properly. My guess is that he will.

Stocks indices have now broken 10% from their most recent highs. Most likely longer term investors are moving in, buying from panic sellers. Historically this is what occurs on 10% washouts. In fact, I won’t be surprised if today or the events of today end up being a watershed day that we look back on in a month or so down the road and say…what an opportunity.

Practically every major commodity market broke today. The reason in part has to be that users of commodities can’t get credit to purchase what they need as easily or at the same terms they could just a week or so ago. Goods that don’t sell have carrying costs. This creates downward price pressure.

Over the past week, the forward lease rates on gold jumped dramatically. If you wanted to lease gold, you had to pay way more interest than but 4-days ago. Today gold fell…sharply. My guess is that lease rates won’t move much, as there is more, not less fear in the marketplace.

I’ve begun something new.

A Mid-Day Metals Market Video Report

I’m just setting the time for publishing this report. Expect it to be recorded and published around 12-1:00 P.M. CST Monday through Friday. When I am on vacation there will be no report as I must be in the office to record them.

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. We'll tell you more about RSS Feeds soon.

http://www.iepstein.com/videos_start.aspx

Let me go on record! I still think the Call Spreads I recommended last week should be used to build a position, now. As I said last week, and I quote what I wrote here, “use this price washout to build your Call position”. Today’s price break offers even pricing.

Let’s once again look at the Seasonal Gold Chart below:

At the beginning of August prices in gold tend to break. In fact, after a short rebound prices can break again later in the month. That is what gold prices are doing now.

Keep in mind that past history does not guarantee what will take place in the future! It is simply a road map of what occurred.

Today is a strong reminder of this since historically gold doesn’t take out the June lows in August, while silver often does. What’s interesting to me is that on a weekly chart basis, gold did not take out June’s low. However, the July low was taken out, something that typically doesn’t occur in the month of August and may turn out to be a concern. Because of the day’s events, I prefer to think what gold is experiencing is an aberration, a not usual event that may be have long term ramifications. Time will tell if I am correct. 

December Gold

Let’s look at the Weekly Chart of Gold below.

On this chart I have labeled the June and July lows. July’s low was taken out today. This is unusual and breaks the historical pattern of higher lows in terms of pricing in both July and August. The June lower low is still in play.  

Now that the July low has been taken out, what to do is the question.

Conclusion and Recommendation

My recommendation is to continue to build your Gold Call Option Spreads. Use this weakness to do so.

Option Call Spread Strategies allow traders to build a long position in Gold, using time and price. Here’s why:

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

·         By establishing them as the market moves lower 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

·         If you discover you were early, as we did today, it allows you to average your pricing

The key to all of the above is being right in the end. We know the event(s) we’re dealing with. We know the volatility and we know the maximum dollar exposure and profit the spreads can generate. Given the price break the markets are witnessing, I like the risk to reward ratio when coupled with the outcome I hope occurs over the next 60-days.

I was early last week in recommending that you begin to enter Gold Call Spreads. However, I was clear in that you not put the whole position on at once. Today I am saying to add more if you are averaging in, which you should be doing. Do not put on your whole position.

Here’s why.

The Federal Reserve is adding funds to the economy…almost on a daily basis which I believe is both inflationary and more importantly not solving the issue at hand. Why isn’t anyone wondering what happens when the Fed takes those funds out. Because it would produce more chaos, that’s what.  Therefore the Fed is between a rock and a hard place. It must consider cutting the Fed Rate in order for funds to move into areas tied to the Fed Fund Rate.

Today investors simply began panic selling of what they could to raise cash. Gold falls into that category, temporarily. In my opinion that will change very soon. If I am right on this, Gold Call Spreads allow you with a way to buy time and direction. The options we’ve been recommending don’t expire until late November. My guess is that between now and then, there will be a “pop” to the upside in gold…at a minimum. How big and how long it lasts will be what we have to deal with.

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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