Get Gold, Be Golden

Name: Brian Henry Company: Archer Financial Services

Years Trading: 15 Favorite Movie: N/A

After struggling to find direction over the last few days, the bull market in gold has been resurrected. The continued weakness in the dollar is the spark that triggered Thursday’s rally, but many other developing factors indicate that gold is good long term.

In terms of the dollar, we find support, but a major recovery at this point is not likely. Hard asset classes like gold will continue to provide safe havens for domestic and foreign investors. Foreign investors are struggling as the value of holdings erodes. I don’t expect the flight to quality for domestic or foreign investors to be eased any time soon. In terms of price action earlier in the week, much of the indecision was related to recent actions by the Fed. Fed actions may continue to limit the flight to quality from time to time, but the Fed has focused on the short term. As a result, these actions have not had a lasting effect on the credit concerns.

I am not going to debate whether or not the actions have had a positive influence, but Wall Street continues to have a difficult time holding gains generated after Fed moves. I expect this to continue. I don't believe there is a quick solution for the credit crunch or housing crisis. I am not sure there is any solution for the current gas prices. These problems have to run their course and that takes time. The general public will continue to be concerned about the economy until they can see stabilization in housing prices, gas prices and feel more confident about being able to retain their current jobs. The financial institutions will continue to announce write downs on bad credit. This credit exposure needs to be defined before we can move forward. Many believe we are about to turn the corner on the credit crunch, but we’ve heard that before.

Another developing situation is the recent stress on hedge funds. Many hedge funds are not handling equity and commodity market volatility any better than anybody else. There have been a few hedge fund failures and others have decided to close and liquidate. While these types of activities will result in some selling, I believe it will also place more of a focus on finding value for future investments. Gold and the other precious metals should be a nice fit. The inability to quickly increase gold production separates it and the other precious metals from most other commodities and increases long-term value. High prices in agriculture products and soft commodities can generate the potential for increased production in a rather timely fashion. Research and development for gold production is time consuming. Production will increase, but it is going to take time.

In terms of getting gold bought, I believe there will be opportunities to buy gold near the current support levels. High prices and unprecedented uncertainty about the previously mentioned factors will continue to generate volatility. This volatility will provide opportunities to get long. I see moderate support in the $975 area of the April contract. Better support builds in around the $965 to $966 area of the same contract. I don’t expect the contract to test the current 20-day moving average of about $959.5 any time soon. That would be a great buying opportunity. The futures market will have sellers. Many participants are prudently taking profits on very profitable positions and the volatility also creates profitable opportunities to the sellers. To this point the trade has been volatile, but also fairly orderly.

Call options and call option spreads may provide ample opportunity, while reducing some of the risk associated with trading futures on days that have $20 plus ranges. I understand that options are expensive, but not everybody has the resources required to hold positions through a substantial downturn. Even the most bullish markets experience sizeable sell offs. Depending on your risk tolerances and price projections, owning calls may be the way to go, but participants with high-risk tolerances may be better suited in the futures market. Individuals with lower risk tolerances should take a look a buying call spreads. Own the lower strike call and sell a higher strike call. This does limit potential gains in a runaway rally, but it also reduces the amount of the investment and neutralizes some of the high volatility premium in these calls. I like this strategy going forward. I believe it provides opportunities to profit through the summer.

Sign up now to receive a 30-day trial to ADMIS commodities research.

Do you have a question about this article? For a personal response within 24 hours, please email brian.henry@archerfinancials.com or call 1.877.377.7965.

This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of AFS is strictly prohibited.

About the Author