Golden Opportunities in Metals
After peaking at an all-time high in late January, gold has been pulling back. I see this pullback as a good opportunity for longer-term bulls, and am recommending scaling in with mini-gold contracts. COMEX April gold futures peaked above $940 an ounce on January 30, but then quickly bottomed at $888.40 by Tuesday, February 4. A rebound in the U.S. dollar was given as a reason for gold’s dip, but periods of consolidation are natural amid such a strong bullish trend. Gold has not only hit record highs, but in January, gold futures rallied more than 9 percent. I see the recent pullback as a golden opportunity for longer-term bulls, and there is continued talk funds backed by gold may be interested buyers too.
I recommend scaling in with mini gold contracts on the long side, which trade on CME Globex nearly around the clock. These contracts are 50-troy ounces, half the size of the big gold contract, and with lower margins than make it a more affordable alternative for individual investors. Consider buying three April gold mini contracts, one at $900, one at $875, and one at $850. If you can execute this strategy, your average entry price would be $875. Every dollar move in the mini equals $33. I
t’s impossible to pick the absolute bottom to get in or the absolute top, given this market's volatility, so this type of strategy is a good way to get in. I would use a $30 stop on the trade at $845, risking $3,000 on the three contracts, not including your commission costs. While gold has popped a bit this morning, I am looking for the market to sell off a bit more, down to $850. If gold hits a new high at $1,000, which I see as a strong possibility by spring, this trade would have a potential of about $10,000, minus commission costs. I feel this offers a good risk-reward ratio, but keep in mind, with futures its always possible to lose more than your initial investment, and stops aren’t always fail-proof. If you are a bit more conservative and are interested in an options trade with defined risk, I’d recommend buying the June $950/$1,000 gold call spread.
I also recommend an options trade in silver on an overall metals rebound. Consider buying the May silver $17.50/$18 call spread for $600, plus commission costs. That’s your defined risk. If gold hits $1,000, silver should move up to $18 to $20.
Richard Ilczyszyn is a Senior Market Strategist with Lind Plus. He can be reached at 800-605-0095 or via email at rilczyszyn@lind-waldock.com.
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