-- Posted Friday, 31 August 2007 | Digg This Article
8-30-2007
Over the past week volatility in stock market indices has not slowed down. Normally it does so in front of Labor Day, but due to the marketplace’s obsession with Credit Market issues, volatility is front and center.
The markets around the world are focusing hard, very hard on whether or not the Mr. Bernanke and his Fed Committee will cut the Fed Fund Rate at their next scheduled meeting, which takes place September 18th. All you need due is turn on CNBC, Bloomberg or financial news articles to see the amount of obsession taking place with what the Fed does or doesn’t do its next meeting.
I mention this because at this point in time, gold seems to be joined at the hip to the fortunes of the 3 main stock indices, specifically the Dow, NASDAQ and S & P 500 Index. It’s not a question of gold holding value against other falling assets, which gold has done a really good job of, as much as what will or can be liquidated if stocks fall hard.
The “recession” word is being tossed around. Many are saying that if the Fed does not cut the Fed Fund Rate that a recession is imminent. Others have lined up saying the Fed’s role is to not correct the mistakes of financial institutions and that no rate cut is necessary. They point out that the Fed’s recent activity at the Discount Window and the daily infusions of capital have settled the capital markets down.
Silver being an industrial metal, has not had the support gold has, nor should it in this environment. All you need do is look at the difference between how gold and silver have been performing. Gold is down from its most recent high, established in May 2006 at $723 by approximately $50 an ounce, roughly a 7% decline. Silver is down from its May 2006 high of 14.97 by approximately $3.00 an ounce, roughly a 20% decline. Silver is much weaker than gold. Next week I will begin covering Silver, as it may offer opportunities right after the FOMC Meeting.
The key to keep in mind is that after Labor Day a number of things are about to occur. Let’s list them out.
First, many financial firms now have to report their NAV (Net Asset Value) of investments they hold or manage as this is month’s end. This may be where the other “shoe drops” as many investors suspect more bad news is about to be released. My guess is that the September reporting period will in large part cap the impact of the Subprime issue since, at least in theory and assuming that the books aren’t “cooked”, firms that have to report NAV will in essence have to report any issues they are having by the end of August to get their NAV stated correctly.
Second, the marketplace is now placing “bets” as to what the Fed does or doesn’t do at its’ next scheduled meeting, taking place on September 18th. My opinion is that no matter what the Fed does on the 18th, the marketplace will become unsettled once the Fed announcement is made. If the Fed doesn’t cut the Fed Fund Rate, I expect stock market prices to immediately sell off. If the Fed does cut the Fed Fund Rate, I would expect a euphoric, “relief” market rally.
Third and most importantly, if the Fed cuts, gold gets a double whammy. Assuming a rate cut, the Dollar probably comes under selling pressure once the reality of falling interest rates set in. Stocks should rally and gold hopefully, tied to the hip of stock market action moves higher. Most importantly, I can already hear the warning of market analysts commenting that the Fed is inflating itself out of the credit dilemma, which is an environment that gold thrives in.
So, my expectation that at least initially, Gold will be pulled along with whatever direction the stock indices move, no matter which course the Fed takes. Silver in my opinion will not be affected as much as gold will be.
Before we get too far along, I want to remind you 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, there are RSS feeds in place to alert you as to when they are posted for viewing. Simply signup for notice when ready for viewing, on our website, using our RSS feed.
http://www.iepstein.com/videos_start.aspx
Look at the chart below that was provided by the Moore Research Center, Inc.
Historically speaking, gold often rallies at the end of August, breaks a bit in mid-September and rallies smartly into early October.
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.
December Gold
Below is a chart of December Gold, through early evening trading today, August 30th. I left in place the “wedge, triangle lines” that I had drawn on this chart the previous week. I’ve also added in “red” the 18-Day Moving Average of Closes.
Prices broke out of the wedge formation, but quickly became stuck, trading basically against the 18-Day Moving Average of Closes for the past 5 trading days.
At this moment I still don’t see a futures market position that I want to recommend. Rather, I like the Call Options that I have been recommending this past month and recommend you continue to hold them.
Conclusion and Recommendation
My recommendation is and has been to build a position in gold using Gold Call Option Spreads, which will limit your risk should my analysis prove wrong. Readers could have accomplished this as prices broke down to the $652 on August 16th, after I began offering my Gold Call Strategies. Since that time, prices have rallied over $25. Yes, I did tell viewers of my reports to use that price break to gradually put these spreads on. In hindsight, pretty good advice.
Very soon you will have to decide what to do before September 18th rolls around. I think you should take partial profit, assuming you have one well before the FOMC Meeting on September 18th. More about that next week.
Why Gold Call Spreads?
The reason to use them is simple. Should my analysis prove wrong, the most you can lose is what you paid for the Spreads including fees and commission. In addition, generally speaking 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 pretty far away, in late November.
Regular readers of my Weekly Metal Report that elected to put on a base position should have already established their base position, per my recommendations. For the past month I’ve been updating the Gold Call Spread Matrix, with the help of one of my brokers, Mark Pesek. Below is another update of our Gold Spread Matrix.
The above spreads take into account a commission of $50 per option plus applicable NFA, Exchange, Floor Brokerage and order transaction fees
These above strategies were complied using data on August 29, 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 off a “leg at a time”. Put it on and take it off as one order and one event.
In addition to my new Mid-Day Videos, I also send out: Twice daily written updates including market commentary, I also record two daily hotlines and record each evening a nightly video containing detailed analysis of market activity in all of the major futures markets. Read below to learn how to access these reports.
To discuss these Gold Call 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
If you haven’t had a FREE 2-Week Trial to our Twice Daily Market Recommendations and access to our nightly videos where we review charts nightly, go to
http://www.iepstein.com and fill out the New Investor Kit Form. We will send the kit and access to our research to you.
As long as you haven’t had access in the past year, you can obtain a Free Subscription to receive access to all of our research, including Nightly Audio/Video Recordings where we cover in detail all the metal markets, when you fill out the New Investor Kit Form on our website.
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.
-- Posted Friday, 31 August 2007 | Digg This Article
