Bullish Trends in Gold and Silver Not Dead Yet
by Ben Kim
We’ve seen major corrections in the metals markets since their peaks in March. While there has been sizeable liquidation in these markets, I don’t think the bullish trends in metals are dead, as evidenced by price action May 20, 2008, which put gold futures back at a four-week high. I recommend positioning for a rebound by year-end, as I feel the recent correction is nearing completion. Price action today is showing buyers are still interested, as gold futures shook off recent losses to trade back up above $920 an ounce.
Gold futures peaked at a record high above $1,033 in mid-March, and silver futures hit a high above $21 an ounce. But within a week of hitting those highs, major corrections ensued, and the market has been in consolidation mode. We’ve seen a large liquidation of fund money funneling out of the markets, and into markets such as equities, which have been rallying after a weak first quarter. The U.S. dollar likewise has been gaining some lost ground, due to interest rate differentials between the U.S, and Eurozone, and on ideas the Federal Reserve may be done lowering short-term interest rates here. While the dollar has bounced, I see it as a correction within the still-bearish trend, without much major upward resistance yet broken on the upside to indicate a major shift in trend. The long-term trend remains lower, and I’m not one to fight the trend. I’m not going to call a bottom or top, but go with the trend for now.
And, I also think inflation is going to stick around for a while, as evidenced by the price of crude oil, which has been hitting new all-time highs weekly, if not daily. June crude oil futures rose to another record Tuesday, May 20, above $129 a barrel. Higher crude oil prices have a big impact on our economy, which includes increasing shipping costs and therefore the cost of consumer goods. Increased inflation should lead to higher metals prices, as many investors see metals as a hedge against inflation, and a safe haven when the economic outlook is uncertain. The 0.4 percent increase in the core producer price index in April leads me to believe inflation is still alive and kicking. Who knows where the top is in crude oil…if it gets to $200 a barrel, there will be significant tickle-down pressures on our economy.
Trading Strategies
Looking at a strategy for gold futures, I would recommend bullish positions in futures and options. From a technical standpoint, the 200-day moving average at $834.10 has been holding as support in gold, and prices are consolidating a bit right now without a clear trend. With this reduced volatility, I think options can be bought at reasonable prices.
I recommend buying the December 2008 $1,025 gold calls for about $3,000, not including commissions. You can also consider or a vertical call spread, which would lower your cost, but also lowers your profit potential. If gold pulls back from current levels, I recommend buying futures at $885, with a stop at $850. You could also consider the mini-gold futures if you want to lower your cost to trade. The December calls give you time for the market to rally back toward previous highs, and I think we’ll see over $1,000 again before year-end.
For silver, I recommend buying the December $18 calls and selling the $19.50 calls, which would cost about $2,000 not including commissions, and offer a maximum profit of about $5,500, not including commissions, if our target is met and silver trades above $19.50 by expiration. I see silver rising to at least $20, if not at new all-time highs. We should see a nice pop in silver, and it could come quick.
As mentioned, money is pouring back into the stock market. However, I’m not sure the worst is quite over yet for the economy, and inflation may be the sticking point. The June S&P 500 futures failed to take out resistance at the 200-day moving average on Monday, May 19, and if it can’t pass that level, it leads me to believe the S&P could quickly fall back. Gold has in the past acted like a safe haven, and if stocks fail, I think more money will head back into gold and silver.
Feel free to call me for more details on these markets, or to tailor an approach for your particular goals and risk-tolerance.
Ben Kim is a Senior Market Strategist with Lind-Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-355-5757 or via email at bkim@lind-waldock.com.
You can hear market commentary from Lind-Waldock market strategists through our weekly Lind Plus Markets on the Move webinars, as well as online seminars on other topics of interest to traders. These interactive, live webinars are free to attend. Go to www.lind-waldock.com/events to sign up. Lind-Waldock also offers other educational resources to help your learn more about futures trading, including free simulated trading. Visit www.lind-waldock.com.
Past performance is not necessarily indicative of future results. The trading of commodity interests entails the risk of substantial loss. Prospective investors should carefully read the Disclosure Document where applicable before making an investment decision.
*No representation is being made regarding the actual or hypothetical performance of the systems at any other brokerage firm or prior to the dates reflected above. These numbers include commissions, but not fees. Contrary to most published results, please note that these monthly returns are calculated based on closed trade profit/loss and do not include changes in open trade equity. Futures trading involves the substantial risk of loss and may not be suitable for all investors. Past performance is not necessarily indicative of future results. All information, including performance and program description, has not been reviewed or verified by Lind-Waldock.
