Ira Epstein's Weekly Metal Report

Last week I wrote that it was my belief that until proven otherwise, the peak in July prices was had been seen at 962.7. I was correct in terms of July but wrong in expecting that a pullback would be seen going into early August.

In terms of monthly action, unless 904.8 is taken out, which was the low in July, I expect August to see a month of price consolidation. I still believe that you should consider long Option Strategies as a way to get long gold.

The Dollar has been in a pronounced downtrend. As it breaks down, gold is supported or bid up. The monthly chart below tells more of a story.

As you see, price action on the Monthly Gold Chart, as shown by the “green lines”, is narrowing in. Each reaction low has been higher than the last low and each reactionary high since February has seen a lower high. I interpret this to mean that consolidation is now taking place.

Couple this with the Seasonal Chart above and the bias, purely in terms of price and time, is to me at least that a breakout to the upside will occur later this year. From what level and when are as usual the most important questions to be asked when using the leverage futures contracts provide.

Gold and the US Dollar have a relationship. Often, yes often the relationship changes. Sometimes the Dollar and Gold rally or break in unison and at other times they have an inverse relationship. World economics and fear often dictate the relationship.

The inverse relationship now has to do with all the debt the US has taken on in order to stimulate the US economy. Yes other nations have stimulus programs in place. However the amount of debt we’ve as a nation committed ourselves to in comparison to our GDP has gotten out of whack. In addition, movement out of the Dollar is taking place as investors are willing to take on investments in risky currencies than that of the Dollar.

As the worst of the economic mess hit in March 2009, the Dollar peaked. Investors who bought Dollars in late 2009, as a safe haven investment, began dumping those Dollars in late March 2009. That dumping continues today.

As the Dollar continues to lose value, investors who dump Dollars look for a place to put their funds. Currently, stock markets around the world, energy and metal markets are where they seem to putting those funds.

I believe the above chart tells the story.

Currency plays are often large and long term. Yes, some question how far the Dollar will fall, but unless there’s another economic crisis, what reason is there for a sustained Dollar rally, given today’s fundamentals.

Shorter term markets adjust. As those adjustments occur, it’s my opinion that you use breaks in gold to get long. If the seasonal trend kicks in as I expect it to, prices could easily advance to new highs by December.

Conclusion

For those interested in gold, I think the way to buy time and play for an uptrend is to do so using Call Options in December Gold.

I have two spreads that I like.

The first is to buy long the December Gold 1000 Call versus the December Gold 1050 Call.

The second is to buy the December Gold 1000 Call versus the December Gold 1025 Call.

In my twice Daily Market Update Report I will tell you the price at which I recommend entry. The nice part is that your risk is limited to the price you pay plus commissions. Upside potential in my opinion is large.

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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 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 The Ira Epstein Division of The Linn Group, Inc or The Linn Group, 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.


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