I am going to use the recent day’s $40 sell off to jump back into the gold trade. It appears that it was a single, badly handled “Sell” order, probably from a foreign government, that took the barbarous relic down so precipitously. I wouldn’t be surprised if it concerned Turkey’s payment for Iranian oil with gold. It will take a few weeks for the truth to leak out.
Gold is not dead, it is just resting. I believe that the monetary expansion arguments to buy gold prompted by QE3 are still valid. But because QE3 is entirely focused on the housing market through the Fed purchase of $40 billion a month of mortgage backed securities, the effect on the broader money supply is delayed. However, I expect it to start kicking in during December, bringing a dramatic increase in the monetary base as calculated by the Reserve Bank of St. Louis.
Worsening strikes at the mines in South Africa also help this position. So does stepped up capital flows into emerging markets. Individual investors have to carry out tax selling which took the yellow metal down 10% from its September high. Foreign central banks don’t.
The (GLD) January, 2013, $157-$162 Call Spread allows for a 3.5% decline in (GLD) from the current spot price to still expire at its maximum point of profitability. The $162 level is also a key support level on the charts, as it is just above the 200-day moving average, giving you further protection. This call spread is really the best way to jump on a moving train. If you can’t do the spread for whatever reason, just buy longer dated calls outright, or the underlying ETF (GLD). This position should do well if the modest “Risk On” rally continues until the end of the year, which I expect it will.
For the longer-term fundamental case for owning the barbarous relic, please refer to my earlier piece on “If You Had Any Doubts About Gold” by clicking here, and “The Ultra Bull Case for Gold” by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. This alert is for the monthly options. Don’t buy the weeklies by accident. The difference between the bid and the offer on these spread trades can be enormous. Don’t buy the legs individually or you will end up losing much of your profit up front. If you don’t get filled, then just wait for the next Trade Alert. There will be many fish in the sea.
The same applies if you don’t understand this trade. Better to watch this strategy unfold on paper in the model portfolio before you try it with real money.
From the Diary of a Mad Hedge Fund Trader.