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May 6, 2013 by Leave a Comment

Beyond the “Spotlight”

For the Week of May 06, 2013

The GBE Trade Spotlight advisory service applies the GBE trading methodology (buying or selling commodity contracts based on breakouts of chart formations and technical indicators) to identify one to two trade setups per week.

Highlighting This Week’s Potential Breakouts:

June 2013 Live Cattle

The June 2013 Live Cattle contract closed below a lower trend line on Friday. There are touches on the trend line at 119.425 (4/16/13), 120.400 (4/22/13), and 121.675 (5/01/13). The Trend Seeker (a US Chart Company tool to help identify market trend) is Neutral, with a Bearish ranking. The MACD, a trend indicator, is bearish, but below the baseline and rising. Until the Trend Seeker changes to a Downtrend, there is no entry trigger. Perhaps it will take the contract to trade through a recent low of 121.675 (5/01/13). A potential sell entry could be on a retracement to the upward sloping trend line. Potential stop losses can go above recent resistance, the high of 124.550 (4/01/13). A potential downside target is the twelve month contract low of 119.375 (4/15/13).

dd-bts1

July 2013 Coffee

Coffee futures continues its sideways trading action since mid-March. The July 2013 contract’s Channel Formation is defined by the high of 144.50 (4/22/13) and the low of 132.70 (4/29/13). The Trend Seeker (a US Chart Company tool to help identify market trend) is Bearish, with a Weak ranking. The MACD indicator is bullish, below the baseline. Perhaps the market has finally made its low after selling off the past year. A 20-day Exponential and 50-day Simple Moving Average are converging. The same is happening with the Stochastic indicator. A close above the top of the Channel, with Trend Seeker changing to an Uptrend and other technical indicators agreeing, will trigger an entry to the upside. If the market continues selling-off, than a close below the bottom of the channel, with the technical indicators agreeing, will trigger an entry to the downside.

dd-bts2

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The “GBE Trade Spotlight” is a complimentary service based on the GBE trading methodology designed for you to leverage the knowledge, skills, and experience of Daniels Trading. Receive trade setups, trade recommendations, and trade management emails when you sign up for the GBE Trade Spotlight Advisory newsletter!

Additional Disclosures
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
Filed Under: Beyond the "Spotlight", Market Analysis, Trading Tips Tagged With: , , , , , , , ,
April 11, 2013 by Leave a Comment

The Gold & Silver Speculator (11 April 2013)

This is a sample entry from Kurt Pfafflin’s newsletter, The Gold & Silver Speculator, published on April 10, 2013.

SELL GOLD, SELL GOLD! GOLDMAN SACHS SEES DOWNTURN IN GOLD CYCLE ACCELERATING, SLASHES PRICE ESTIMATES & RECOMMENDS INITIATING NEW SHORT COMEX POSITION. MEANWHILE, BANK OF JAPAN OPENS THE QE MONETARY FLOODGATES SETTING THE COURSE FOR UNPRECEDENTED EASING.

Greetings!

Gold & Silver Bears rejoiced in ecstasy today as Goldman Sachs Commodities Research report torpedoed Gold’s fragile bounce off the $1539 low print last Thursday, shredding -$30 off intraday.

Friday morning’s pathetically weak Non-Farm Payrolls (NFP) shocker caught the Bears off guard, forcing some of them out of their profitable shorts and fueling a $50 short-covering rally that continued through Tuesday’s session, marking a high of $1590 before succumbing to the relentless negativity propagated by the likes of Goldman Sachs and Société Générale among many others.

While the amazing, high-flying S&P zooms to a new, record-setting all-time high, extreme pessimism reigns supreme in the Precious Metals markets. Although the Bulls’ hopes of igniting a larger spike higher have been absolutely crushed (yet again), highly-profitable Bears should have some doubts about how much longer this stranglehold on sentiment and price can last.

Today’s uber-bearish GS commodity research report and short-sell recommendation comes at a very interesting time – just as the desperate Bulls get a bounce off critical well-tested, long-term support and especially when viewed against last week’s Commitment of Traders (COT) reports for the Gold & Silver futures markets (see chart analysis below).

I’ve often wondered whether their analyses would be any different if they were to view the “barbarous relic” as the hard currency and historical store of value it has always been as opposed to a simple commodity that is merely produced and consumed? I guess we’ll never know?

Based on their research, GS analysts – in their infinite wisdom – apparently believe the recent downturn in the Gold cycle is accelerating so they are slashing their near-term and long-term gold price forecasts and positioning themselves on the short side of the market.

They are also recommending initiating new COMEX futures short positions to their clients (with June Gold trading $1560, they’re shooting for a -$120 drop down to $1450 with a stop-loss $90 higher at $1650).

So, why is GS so bearish on the yellow metal? Their justification for such extreme negativity towards Gold appears to be primarily predicated upon GS economists’ expectation that a substantial acceleration in US economic growth later this year will support higher real rates and ultimately destroy demand for Gold.

Ahem. Maybe its just me but Friday’s miserable NFP reading of only +88K jobs added versus the lowest estimate of +200K just doesn’t seem to be the type of positive acceleration they’re looking for? Let me go on record to say that I stand in complete disagreement with their line of thinking.

Here are Goldman’s JUST REDUCED USD-denominated Gold price forecasts (take them for whatever they’re worth to you. Or don’t take them at all.)

2013 YEAR END: GOLD $1,450 (-$110 FROM CURRENT PRICE $1560 BASIS JUNE)
2014 YEAR END: GOLD $1,270 (-$290 FROM CURRENT PRICE $1560 BASIS JUNE)

Meanwhile, in an effort to reach their 2% inflation mandate or target within the next 2 years, the Bank of Japan announced shockingly aggressive, bold, new quantitative and qualitative monetary easing programs.

Parroting last summer’s quote from ECB’s Super Mario, bureaucrats and politicians in the Land of The Rising Sun will do “whatever it takes” as they implement what they believe to be the ultimate solution to finally rid their economy of deflationary forces.

Japan has embarked upon what has been called the largest sovereign balance sheet expansion known to man – far greater than the US Fed’s QE measures percentage wise. The BOJ is now set to unleash an unprecedented flood of liquidity into world markets. Will any of that eventually find its way into the Gold & Silver markets? Only time will tell…

Please refer to the charts below for further commentary and analysis…
*Look for email alerts/market updates should conditions warrant or if/when environment allows

JUNE GOLD (GCM3) – WEEKLY CHART

gold1

MAY SILVER (SIK3) – WEEKLY CHART

silver1

“Buy when there’s blood in the streets, even if the blood is your own.”
– Baron Rothschild (1871)

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Filed Under: Current Events, Gold & Silver Speculator, Market Analysis Tagged With: , , , , , ,
March 21, 2013 by Leave a Comment

Feeder Cattle Sell Off’s for Dummies

This is a sample entry from John Payne’s newsletter, This Week in Grain, published on March 20, 2013.

The liquidation of the livestock industry continues today, led by deferred feeder cattle contracts. I believe much of this is due to the sequestration of meat inspectors. Here is a short and simplified cause/effect chain for those who are new to trading cattle:

  1. No meat inspectors or less meat inspectors = less/slower beef production
  2. Less/slower beef production = less demand for fat cattle to turn into food
  3. Less demand for fat cattle = live fat cattle remains on feed longer, slowing the supply chain
  4. Slower supply chain = less demand for feeder cattle from feed lots
  5. Less demand for feeders = more supply sitting around the cow/calf operation yards (these are the people who feed calves and get them to 800 lbs)
  6. More supply just sitting around, combined with falling prices = industry in crisis

MAJOR EFFECT = LESS PRODUCTION OF MEAT, HIGHER PRICES DOWN THE ROAD

Right now, it’s a circle started by a sudden loss in demand of beef by packers. This doesn’t mean humans aren’t demanding more meat. This loss of demand comes from the slowing of production of beef. The cow/calf operators are the ones getting beat up the most. In the grain business, farmers can simply store grain and wait for better prices. Their risk lies with keeping the grain in good condition. In livestock, we are dealing with live animals. These are investments that have to eat. If they die, they are worth nothing close to what they are when they make it to the end of the supply chain. This leaves the cow/calf guys with two choices:

  • Liquidate the herd, get rid of everything. This is not attractive because the bids from the feed lots are really low (weak basis see #4).
  • Fatten the cattle themselves; cutting out the feeder market and sell on the live market once they are fat. This choice is not any easier. Feed prices are high. That said, I believe operators are making this choice. Cash corn is up 60 cents over the past two weeks. This sudden demand for grain does not fall out of the sky at this time of the year. Someone new is buying feed.

I believe we are seeing a lot of both choices. The market is being flooded with feeder cattle as operators throw in the towel. They are doing this by either moving product or selling futures. These guys are normally the toughest around; they know how to handle risk. But even this break is too much to handle for some. The crush margins are improving, but are still in the red as they have been for months. The silver lining is that the market is doing the government’s job for them. Less cattle being raised = less need for beef inspectors.

The wild card here is the fact that maybe we have too many meat inspectors already (the government wouldn’t hire a bloated staff, would they?) Maybe the administration is just selling fear. Maybe the invisible hand kicks in and the packers start to see some value. Maybe this will be seen in the cash markets as we come out of Lent. The “maybes” are starting to add up. For a market, the only thing worse than bearish fundamentals is uncertainty. This is a perfect example of that belief.

If we could get some certainty and it would result in reversing steps 1-6 above, god bless those who are sitting short this market. The bounce could be ruthless. That said, I’m not so sure the government is going to come to the rescue. I think the safest bet is the prediction that the next 6 trading days are going to be full of fireworks.

APRIL/AUGUST CRUSH SPREAD

apr-aug-spread

FRONT MONTH FEEDERS (WEEKLY/ROLLED)

front-month-feeders

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This Week in Grain (T.W.I.G.) is a weekly grain and oilseed commentary newsletter written by Senior Broker, John Payne, designed to keep grain market participants on the cutting edge, so they can hedge or speculate with more confidence and precision. Subscribe to This Week in Grain today!

Filed Under: Livestock/Meats, Market Analysis, This Week in Grain
February 28, 2013 by 1 Comment

The Gold & Silver Speculator (27 Feb 2013)

REALITY BITES: BERNANKE TESTIFIES – FOMC WILL CONTINUE ASSET PURCHASES UNTIL FED OBSERVES A SUBSTANTIAL IMPROVEMENT IN THE OUTLOOK FOR THE LABOR MARKET IN A CONTEXT OF PRICE STABILITY. BENEFITS OUTWEIGH RISKS…

The Gold & Silver markets have suffered steep drops since Valentine’s Day, as Gold collapsed -$116 in 2 weeks (from $1670 to $1554) and Silver sank – $2.79 (from $31.10 to $28.31).

Since last October, the heavy metals, hard currencies have been dumped by traders/investors and dismissed as dead by an ever-growing group of market analysts/investment banks. Extreme negative sentiment continues to rule the day. That’s hardly surprising considering Gold has given up nearly $250 ($1801 down to $1554 = -13.7%) and Silver has shed about -$7.00 an ounce ($35.30 down to $28.315 – = -19.7%).

Quite simply, Gold & Silver Bulls have been gutted: the pessimism, even outright disgust, hasn’t been this strong since Fall 2008 when the whole world was on the knife’s edge of Financial Armaggedon…

Strangely enough, meanwhile, the world’s Central Banks, have been happily devouring physical Gold bullion at largely marked-down, “Fire Sale” prices. In fact, they swallowed up more than 530 tons of the Yellow Metal last year: the most bought in nearly 50 years!

There have been a number of bearish themes that have dominated over the past several months, giving Gold & Silver Bears plenty of cover and ammunition to load up on the short side of the markets. Even since before Christmas/New Year, there was talk of major hedge fund redemptions and investor liquidations ahead of the “Fiscal Cliff.”

Recent filings show that Mr. Soros (among other well-known Money Managers) severely cut their holdings/exposure to Gold and the ETPs have seen some reductions in length as well. The markets have interpreted these events as absolute proof or confirmation that Gold is going nowhere but down.

Another bearish theme that has apparently become gospel (to some…in fact, many) revolves around the Great Never-Ending, Liquidity Fueled (Yet Economically Challenged) Stock Market Rally and the idea that heavy money flows are gushing out of Gold & Silver into stock markets, based upon much-improved prospects for a strong economic recovery in the United States. (oh, and that everything over in Super Mario’s Europa is all taken care of, no major problems looming on the horizon or anything – cough, Italy, cough, ECB, cough, OMT, cough, UK Downgrade, OMG!)

A product of this questionable line of thinking is the projection or estimation that Mr. Bernanke and his FOMC – in their infinite wisdom, will be ending QE sometime in the 2nd Half of 2013. In fact, Goldman Sachs just issued (another) less-than-optimistic research report detailing this belief while slashing their short-term and long-term targets for Gold. (FYI, they’ve already called for the Death of the Great Gold Bull Market so we really shouldn’t be surprised by their acceleration).

But sometimes reality has a way of creeping back into the picture, no matter how furiously facts are ignored or denied. Although the FOMC Members have done a fine job of managing expectations, releasing Meeting Minutes that show a vigorous debate as to the efficacy of extraordinary monetary measures and point to the potential of eventually halting the QE, according to Mr. Bernanke’s sworn testimony, the FOMC will continue asset purchases until they observe a substantial improvement in the outlook for the labor market in a context of price stability.

Furthermore, he went on to state that the benefits outweigh the risks; in other words, the Easy Money ain’t gonna end anytime soon. (And for that matter, Mr. Shinzo Abe and whoever he selects as Head of BOJ are about to embark upon a similar course.)

While his testimony didn’t cause an immediate spike higher, it was certainly enough to spur some short covering – the market rallied nearly $40 higher intraday. It was enough to give some Bears pause – perhaps putting them on notice that the incessant “QE Is Ending This Year” chatter is nothing but nonsense.

Mr. Bernanke’s enlightening testimony arrives at a critical juncture for Gold and Silver. They’re both testing the lower support levels of their grueling year+ consolidations. The composition of the markets – especially Gold, as measured by the Commitment of Traders (COT) Report, revealed that the Managed Money or Hedge Funds (ie Large Specs) are loaded for Bear up to the gills on the short side of the market. This stands in direct opposition or contrast to the Short-by-Nature Commercials (or Dealers) who have heavily reduced their short exposure on the recent spike lower.

This COT condition is extremely bullish from a contrarian standpoint: should some bullish catalyst spark a move higher (for example, Italian elections didn’t really work out as planned and could critically impair ECB’s austerity plans/OMT requirements), the enormous Hedge Fund short position would become rocket fuel for a massive short covering squeeze as they would have to be unwound at higher and higher prices.

When everybody and their Mother (and brother, etc) are so supremely confident in their bearishness and with the markets so imbalanced on the short side, it is likely only a matter of time before they are reintroduced to reality…Prepare yourselves accordingly.

IMPORTANT UPCOMING DATES ON THE CALENDAR THIS WEEK:

TUESDAY 2/26/2013 & WEDNESDAY 2/27/2013
TUESDAY 9:00AM (CT) – Federal Reserve Chairman, Ben Bernanke will testify on the Semiannual Monetary Policy Report before the Senate Banking Committee, in Washington DC
WEDNESDAY 9:00AM (CT) – Federal Reserve Chairman, Ben Bernanke will testify on the Semiannual Monetary Policy Report before the House Financial Services Committee, in Washington DC

THURSDAY 2/28/2013
MARCH GOLD & SILVER (GCH3 & SIH3) FUTURES – FIRST NOTICE DAY (FND)
Any long March Gold/Silver futures position holders must exit/liquidate their open positions PRIOR to FND (ie before the CLOSE of trading on WEDNESDAY 2/27/2013) unless they intend to Stand For Delivery as that is when the CME/COMEX can begin assigning deliveries to those long futures contract holders.

“ROLLOVER” – IN ANTICIPATION OF FIRST NOTICE DAY (FND), TRADING VOLUME & OPEN INTEREST HAS ALREADY MIGRATED TO THE APRIL FUTURES CONTRACT FOR GOLD (GCJ3) & THE MAY CONTRACT FOR SILVER (SIK3).

Please refer to the charts below for further commentary and analysis…
*Look for email alerts/market updates should conditions warrant or if/when environment allows

APRIL GOLD (GCJ3) – WEEKLY CHART
april-gold

MARCH SILVER (SIH3) – WEEKLY CHART
march-silver

“When it becomes serious, you have to lie.”
— Jean Claude Juncker, Prime Minister of Luxembourg and head of the Eurogroup council of Eurozone Finance Ministers (April 2011)

Subscribe to The Gold & Silver Speculator Absolutely Free!

This is a sample of the analysis from my weekly precious metals market commentary newsletter, The Gold & Silver Speculator. Register now to receive the most relevant investment information and trading tools to participate in the gold and silver markets!

Additional Disclosures
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
Filed Under: Market Analysis, Metals Tagged With: , , ,
June 24, 2011 by Leave a Comment

Technically Speaking: Markets You Should Be Watching RIGHT NOW!

August Gold

Selling on a technical break below a significant trend line.

Consider selling a break with a 1510.0 stop order to sell.

Risk would be a retracement back above the trend line at 1530.0

With an objective of 1450.0

Trading the regular contract:

  • risk is $2,000.00
  • objective is $6,000.00

Trading the mini-contract (1/3 the contract size of the regular):

  • risk is $667.00
  • objective of $2,000.00
Please click to view the Risk Disclosure below.

Have a look:

August Gold Chart

August Gold Chart



November Soybeans

Selling on a technical break of a significant trend line.

Consider selling below the trend line at 1330’0

Risk would be a retracement back above the trend line at 1360’0

With an objective of 1220’0

Trading the regular contract:

  • risk is $1,500.00
  • objective is $5,500.00

Trading the mini-contract (1/5 the contract size of the regular):

  • risk is $300.00
  • objective of $1,100.00
Please click to view the Risk Disclosure below.

Have a look:

November Soybeans Chart

November Soybeans Chart



Follow the Moves of a Technical Trading Pro

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Filed Under: Cullen Outlook, Grains/Oilseeds, Market Analysis, Technical Analysis Tagged With: , , , , , ,
June 6, 2011 by 1 Comment

US Treasury Bonds and Notes: A Beginner’s Guide

All eyes are on the debt market these days.  Volatility in the debt market is forcing investors and traders to shift their assets as the global markets spin out of control.  News of Greece defaulting on its bonds, the US raising its debt ceiling, and economic activity in the Far East have traders and investors scrambling.  One way to take advantage of the changing interest rates and market fluctuation is through trading United States Treasury note and bond futures.  Whether using Treasury bond futures to hedge one’s portfolio or speculate on market fluctuation, US debt futures offer an ideal way to take advantage of market volatility and manage risk.  Below I will explain some basics of the US debt market, specifications of US Treasury bond futures, and an example of a 30-year Treasury bond future trade.

Debt Market Basics

The United States government has outstanding debt that exceeds 14 trillion dollars.  Since 1962 the debt ceiling has been raised 74 times.  The United States government issues debt to fund expenditures that exceed revenues.  Simply put, the United States debt market exists because of the United States government obligation to its lenders.  US government debt levels affect everything in our society.  Inflation, interest rates, economic growth, and the taxes that are levied are directly linked to debt levels.  The United States dollar is the world’s reserve currency.  Further, the United States has never defaulted on a debt payment or failed to meet an obligation on its bonds.  For these reason, United States Treasury bonds are considered the safest investment in the world (this also allows the US government to borrow at some of the lowest interest rates in the world).

When there are shocks or bad news in the market, investors flock to the US t-bonds for a safe haven to protect their capital.  This is referred to as a “flight to quality” and usually drives interest rates lower.  However, when the economy faces good news, investors abandon the safety of Treasury bonds and invest in other products that offer more attractive yields.  This causes prices to drop and interest rates to rise.  A key factor to understanding bonds is that prices are inverse to rate.  When interest rates rise, prices on bonds fall (and vice versa).  The higher the price of a bond, the lower the interest rate is on the bond.  Safe investments traditionally produce lower yields as investors sacrifice yields for safety.

Traders use Treasury bond futures because they are able to place trades instantly while only needing the proper margin in ones account to place the trade.  Traders also have confidence that the exchange guarantees all trades.  This is essential for traders to manage risk or speculate on fluctuating interest rates.  There may be no other tradable asset that offers such a direct link for exposure to economic events and interest rate exposure with liquidity and transparency.

United State Treasury Bond and Note Specifications

The 30-year bond, 10-year note, and 5-year note are some of the most heavily traded futures contracts in the world.  These debt products are traded both electronically and on the trading floor at the Chicago Mercantile Exchange.  The futures are based on $100,000 pare values and traded in tics and points.  There are 32 tics in each point.  Each point is worth $1,000 and each tic is worth $31.25 ($31.25 x 32=$1,000.00).  The 5-year note is traded in 1/4 tics ($7.8125) and the 10-year note is traded in 1/2 tics ($15.625).

You can view the full contract specifications on the main Daniels Trading website.

The 30-year t-bond is the traditionally the most volatile contract in the yield curve.  Because investors cannot foresee events going forward for 30 years, the contract has the largest price movement.  Conversely, the 5-year note is much less volatile as investors are locked into the maturity for a shorter period of time.  Long term interest rates can be extremely difficult to forecast and the longer the maturity of the bond, the more affected the bond will be economic events.

Basic Trade Examples

To get a better understanding of how a trade works with Treasury bonds futures, we can follow the story of Trader Pete.  Trader Pete is concerned that interest rates have remained low for too long and is concerned that inflation is around the corner.  Pete has charted the markets and read research indicating that the economy may be picking up steam.  Pete sees that the 30-year Treasury bond is trading at a price of 125 09/32.  Technically, Pete sees this as a good level to short the market and his fundamental research of rising economic activity supports this idea.  Pete decides to place a trade to sell one US Treasury bond at a price of 125 09/32.  Because Pete is discipline he adds a stop loss order at the price of 126 05/32 in the market in the event that his analysis is incorrect.

If Pete is correct and inflationary pressure mounts due to improving economic news, the price of Treasury bonds will fall and trader Pete will profit from the trade.  Pete sees that the price of Treasury bond futures has fallen to 122 17/32 and decides to close his position out for a profit of $2,750 (minus commissions).  However, if Pete is incorrect and the economy remains sluggish and actually gets worse, Treasury bond prices will rise.  Because Pete has a stop above the market at 126 05/32 he will be stopped out losing $625.00 (plus commissions).

Summary

Treasury bond futures are an excellent way for investors, hedgers, and traders to manage risk and get the exposure to changing economic events that affect everyone in our society.  They offer the flexibility of trading from the short side or long side while offering market access and liquidity.  Treasury bond futures offer traders the ability to trade and take advantage of world events, and understanding the characteristics of this asset class is important.

Free eBook: How to Make Your First Futures Trade

If you’ve always wanted to get involved in the commodity market but were unsure how, this guide will turn that mountain into a molehill.  Download “How to Make Your First Futures Trade”.

Stop Orders Risk Disclosure:  This website may make certain references to the use of stop orders as means of limiting losses or protecting profits.  Please note that there is no guarantee that any stop loss order will be executed at the stop price.  Therefore, there can be no guarantee that placing a stop order will limit losses or protect profits.  Accordingly, no representation is being made that the trading in customers’ accounts will be profitable or will not result in losses as the result of placing stop orders.

Filed Under: Getting Started, Market Analysis Tagged With: , , , ,
April 26, 2011 by Leave a Comment

4 Ways to Invest in Gold

Is this the Most Historic Gold Bull Market Ever?

I’m sure many of you are learning more and more about gold these days due to inflation fears, economic fundamentals and geopolitical events.  In my opinion, each of these factors is making its case for gold.  In fact, I believe we haven’t seen a bull market to this degree since the late 1970’s – early 80’s.  Therefore, I thought this would be a great opportunity to write an article on the many basic ways an individual investor can participate in the current gold bull market.

Physical Gold / Gold Spot Market

Perhaps the most popular way to invest in gold is to purchase physical gold.  Pros call this the “spot market.”  Spot means cash price.  This is the price at which an investor can buy gold today in the form of physical coins or bars, which can then be delivered to the investor’s house or banking institution.  You have probably seen many new companies selling gold and silver.  I used to work for one of these physical metals firms, and I must advise a word of caution when dealing with the spot market.  Some unscrupulous firms use “bait and switch” tactics, so one must be very careful and perform due diligence. I recommend using the Better Business Bureau (B.B.B.) to check the reputation of a company prior to making a purchase.  I also recommend utilizing basic coins like Golden Eagles, Vienna Philharmonics, or Maple Leafs for delivery.  Moreover, I advise to not get diverted into rare coins or other products, as the selling firm will likely add a much higher premium to these products.  Finally, be very careful with bank storage programs.  From my understanding, some banks are being very difficult when it comes time to deliver!

Precious Metal ETFs

Another way to invest in gold is using gold ETFs.  ETF stands for Exchange Traded Fund.  There are many new ETFs out there, but one should seek to understand the tax implications and costs with gold ETFs prior to investing.  Also remember these forms of investments are not backed 100% by the gold they display, so if you want delivery, this is not the correct vehicle for you.  ETFs are simply a financial vehicle, not the physical product.  Here is a short list of precious metal ETFs: GLD, SLV, GDX, DBB, IAU, GLTR.

Mining Stocks

A gold investing vehicle that may take the least amount of capital would be buying Junior Mining stock shares.  These are more effectively exploratory companies or small time producers.  I do know there are different tax implications with equities versus gold futures so one must consider this as well and consult a C.P.A.

Gold Futures

In my opinion, one of the best ways to invest in gold is through futures contracts.  Futures can be perceived as much more complicated, but my personal belief is that there are many advantages along with the potential disadvantages.  Gold futures contacts are traded in three sizes:

Contract Specifications:

Contract Symbol Size
Gold Futures (Full Contract) GC 100 troy ounces
COMEX miNY Gold Futures QO 50 troy ounces
E-micro Gold Futures MGC 10 troy ounces

The following example uses the Full (100oz) gold futures contract:

If the price of gold is $1,300.00 per ounce and you’re holding a full size contract the total value of that contract is $130,000.00. In terms of margin, you only have to invest $6,751 to control this contract.  An important point to remember is that a $67 dollar move in gold can essentially wipe out your account if you are undercapitalized.  My recommendation for new traders is to not use the minimum margin requirements as a guide to fund your account.  I would personally use double to triple the amount required.  Therefore, you have a lot more room for error and can potentially survive the volatility.  Every $1.00 dollar move in gold futures equals $100 for the full size contract.  Furthermore, I would always recommend gold futures versus other vehicles because of the transparency, available trading software, nightly statements, and regulation by the Commodity Futures Trading Commission (C.F.T.C.) and National Futures Association (N.F.A.).

Before investing in gold, I recommend that you call a Series 3 licensed broker who can listen to your objectives and then direct you to the right investment vehicle.  Whether you want to trade or invest using managed futures, automated strategies, a broker-assisted account or a self-directed account, speaking with a knowledgeable commodity futures broker can help you to gain knowledge and comfort in the decision making process.

Special Report:  “Real” Inflation to Feed the Gold Bull Market

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Filed Under: Getting Started, Market Analysis, Metals Tagged With: , , , , , , , , , , ,
February 9, 2011 by Leave a Comment

Strike Gold:  Trade Silver Using Bull Call Option Spreads

Turbulent.  Violent.  Ferocious.  Vicious.

These are frightening terms many unsuccessful traders would use to describe their experiences when attempting to trade the Silver futures market.

Due to its large futures contract size – 5000 ounces of Silver per contract and an ever-increasing exchange margin requirement of $11,000+ per contract – traders and brokers have nicknamed Silver “The Widowmaker” for good reason as it seems to have an uncanny knack for punishing traders when they’re wrong, especially when traded irresponsibly by those who are impulsive, stubborn, undisciplined, and overleveraged.

Are you scared yet?

Adding physical silver bullion in the form of coins or bars is a vital component to every investor’s well-diversified portfolio, but that is an entirely different investment enterprise than trading the great white precious metal using leverage in the futures market.

As traders of futures and options on futures, we have to accept that any market can be erratic and unpredictable.  While extreme volatility, exaggerated price spikes, and large daily price ranges are to be fully expected and can be downright nasty, the Silver futures market is not something to fear or run away from.

Rich in history, the lure and appeal of successfully trading Silver, the “Poor Man’s Gold,” continues to attract and tempt a wide and growing variety of traders and investors from every corner of the globe.

GET COMFORTABLE:  ACCEPT RISK & DEFINE YOUR REWARD

If you’re willing to forego the often attempted but rarely achieved consistent daytrading profitability in favor of capital preservation and prudent risk management through the use of Bull Call Option Spreads, you may become a battle-tested trading veteran who would characterize the raging, white-hot Silver market as challenging, yet ultimately highly rewarding…maybe even exhilarating.

The January 2011 consolidation phase or technical correction – a “terrifying” 16 percent cliff dive in less than a month (the white metal boasts an 80%+ gain in 2010) – now appears to have run its course, resolving itself strongly to the upside, back in favor of the long-term bullish uptrend.

Below I will illustrate how you can “strike gold” by taking advantage of this opportunity to get long on the resumption of Silver’s long-term bull trend – in case you didn’t know, its going on 10 years and counting – by putting on a Bull Call Option Spread as it looks to challenge and surpass recent contract highs.

This trading strategy offers bullish traders and investors the opportunity to carefully define both their risk and their reward before deploying capital on the trade.  It allows one to trade the Silver market directionally with prudent money/position management – with the ability to “Get Long” using Silver futures option spreads without exposing your account to a very large exchange margin requirement ($11,000+ per contract) and the always present equity/event risk when holding a futures contract position overnight.

Here is a primer on how a Silver Bull Call Option Spread trading strategy could work for you:

BULL CALL OPTION SPREADS (DEBIT SPREADS) – THE NUTS & BOLTS

The terms bull and call imply a bias toward an upward price direction, so this strategy involves a spread that goes long the market by using call options.  Debit implies that you are paying for the trade and that the costs are being debited from your account.

Some refer to this as a vertical bull call spread.  What is usually involved in this strategy is:  the purchase of a close-to-the money or an in-the-money call and at the same time the sale of a further away strike price (out-of-the-money) call option of the same expiration date (or same expiration month).

The close-to or in-the-money call option may cost a great deal of money as it is near or lower to where the underlying futures contract price is trading, especially if there is substantial time remaining until the option’s expiration.  Traders spread this cost off (or finance it) by selling or writing a further out-of-the-money call option.

When you sell or write a call, you collect premium or receive a credit to your account.  This credit reduces the cost of the close-to or in-the-money call option.

The profit/loss profile for this strategy is a limited risk and a lower expense for the investor as premium costs are reduced (or financed) by the sale of the higher strike price call option.  The short call is covered by the long call, so there is a predetermined risk factored in this trade and no unnecessary risks associated with option writing or selling (aka naked shorts).

The maximum profit potential is limited to the value between the two strike price levels minus the premium costs, the commission, and exchange fees.

SPECIFIC MARKET EXAMPLE – THE STRATEGY:
May Silver 26.25/27.25 Bull Call Option Spread

Let’s review a specific market example:  After hitting a contract high of $31.27 on 1/03/11, near the end of the 1/25/2011 trading session the May Silver market continued trading lower while in the midst of a widely-publicized consolidation phase or technical correction posting a low of $26.575 during this session.  (The daily range on 1/25/11 was LOW:  26.54 to HIGH:  27.04)

For this example, we will use the May Silver 26.25/27.25 call option quote prices taken from floor brokers at the end of the 1/25/11 session.

ENTER THE SPREAD:  GETTING LONG on 1/25/11
(OPTION EXPIRATION DATE:  4/26/11)

BUY 1 May Silver 26.25 Call Option – pay $2.15 premium (-215 cents x $50) =
-($10,750) DEBITED From Cash/Account

SELL 1 May Silver 27.25 Call Option – receive $1.65 premium (+165 cents x $50) =
+$8,250 CREDITED To Cash/Account

NET DEBIT TO ACCOUNT TO BUY/GET LONG THE SPREAD

-$0.50 (-215 cents paid vs.  +165 cents received = -50 cents) =
-($2500.00) PREMIUM PURCHASE PRICE TO ENTER SPREAD

MAXIMUM PROFIT POTENTIAL AT OPTION EXPIRATION

The maximum profit potential is limited to the level between the two strike prices (27.25 – 26.25 = $1.00 or 100 cents x $50/cent = +$5000) minus the premium costs (-$2500), the commission and fees (approximately -$160 per spread at $75/RT/per option and exchange fees.  This would double if the spread is profitable and taken through expiration/converted to futures contracts then offset immediately).

(27.25 Call Strike – 26.25 Call Strike = $1.00 or 100 cents x $50/cent = +$5000) – (-$2500 – $160 or -$2660)
= +$2,340 POTENTIAL PROFIT / 93.6% GAIN PER SPREAD BEFORE COMMISSION/FEES

ULTIMATE OBJECTIVE

The ultimate objective would be for the May Silver futures contract to close above 27.25 on the Option Expiration pit session (4/26/11 @ 12:25pm Chicago Time) to max out the potential profit on this spread.

Upon option expiration, the call options would automatically be converted into long and short futures positions that immediately offset one another (there is no margin risk involved).  The difference between the strikes as described above minus the total cost of the spread or +$2,340 would then be credited as a positive gain back into your account in addition to getting back your original premium paid/trade cost of $2660.

BEST CASE SCENARIO

The best case scenario would be if the May Silver market surges higher than 27.25 at any time prior to option expiration, you can ask your broker to go to the floor to request quotes to find out what the current market value would be to liquidate the position (to sell back or cover the spread).

If we were to attempt to exit/liquidate/sell the spread prior to expiration, to obtain an approximately equal amount of maximum potential profit, the value of the spread would need to be quoted on the floor as Bid @ 100 cents – which is a 50 cent increase from the 50 cent entry/purchase price.

WORST CASE SCENARIO

If the market does not trade higher, you should guard against an erosion of spread premium value by using either a predetermined “mental stop-loss” level based on the futures price and spread quote values or overall loss of capital level and exit the spread, taking a reasonable loss.  Or, the worst case scenario would be the May futures closing on option expiration day below the 1st call strike of 26.25 to allow the spread to expire worthless upon expiration, losing the total premium paid.

TRADE CONCLUSION

On Tuesday 2/08/11, the May Silver market skyrocketed or spiked higher almost an entire dollar in a single session, putting the May Silver 26.25/27.25 Bull Call Spread into very profitable territory.

If one wanted to purchase this spread on the morning of Tuesday 2/08/11, it would cost a trader approximately $4.04 ($20,200) to purchase the May 26.25 Call and they would receive $3.08 ($15,400) by selling the May 27.25 Call.

The difference (or their cost to get long/purchase it) is $4,800 (or 96 cents), which represents the new value of our spread.  It has increased from the 1/25/11 entry price of $0.50 to the current price of $0.96 ($4.04 or -404 cents paid vs.  $3.08 or +308 cents received) = an increase of +$0.46 or $2300 gain to your account (46 cents x $50 per cent).

For all intents and purposes, this spread has nearly reached its maximum potential value at options expiration.  This is an extremely favorable position to be in.  At this point, the spread can (and should) now be liquidated/exited by selling it on the floor.  Or, if you prefer, you could hold the position through to option expiration (EXPIRATION DATE:  4/26/11) if you’re confident that the May Silver price will remain above 27.25.

However, I would strongly suggest placing a Good Till Canceled (GTC) limit order with your broker to use the floor to max out/liquidate or “sell the spread at maximum potential expiration value” as that eliminates your risk exposure, adds positive equity to your account (over +90% gain before commissions/fees), and allows you to refocus and reload for the next trading opportunity.

This is a strategy specifically designed to be somewhat more defensive or “conservatively realistic” in nature.  It did not shoot for the moon (an example of that would be getting long a May 35/40 Bull Call Spread when the market is trading at 20) but allowed you to enter the position relatively “close” to the market with a higher degree of probability for potential success and profitability.

FEAR NOT – EMBRACE OPPORTUNITY

The only thing to fear when using a Bull Call Option Spread is a complete loss of capital paid to purchase the spread.  Since you can clearly define what level of loss you are willing to tolerate in terms of the premium you are willing to pay for the spread, there’s really nothing to fear at all.  You must be comfortable with the risk of loss in any investment or trading endeavor in order to position yourself to reap the reward, if successful.

Bull Call Option Spreads (and conversely Bear Put Option Spreads if you’re bearish on a market) give you the flexibility to trade directionally with the ability to tightly manage risk by constructing how close the spread position is in relation to the market price and where you believe it will trade in the future (ie you can carefully position the strikes to be more defensive or aggressive in nature.  This particular spread example used an In-The-Money Call PURCHASE and an Out-Of-The-Money Call SALE).

This limited risk/limited reward type of trading strategy can be used singularly or even in conjunction with targeted long-term and short-term (intraday/countertrend) futures trades and can offer you a relatively risk averse way to potentially extract profits in the blazing Silver market – especially if you layer in multiple lots and farther out Bull Call Option Spreads (in terms of both price and time).

LEARN MORE ABOUT HOW OPTION SPREADS CAN WORK FOR YOU

If you would like to learn more about how option spread strategies could work for you and your trading, please contact me via the Daniels Trading website.

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Spreads Risk Disclosure:  A spread is defined as the sale of one or more futures or option contracts and the purchase of one or more offsetting futures or option contracts.  It should be recognized, though, that the loss from a spread can be as great as – or even greater than – that which might be incurred in having an outright futures or options position.  An adverse widening or narrowing of the spread during a particular time period may exceed the change in the overall level of futures or option prices, and it is possible to experience losses on both of the futures or options contracts involved (that is, on both legs of the spread).  In addition, spread trading increases transaction costs because the customers will be charged commissions on each leg of the spread.

Options Risk Disclosure:  An option on a commodity futures contract is a right, purchased for a certain price, to either buy or sell a commodity futures contract during a certain period of time for a fixed price.  Although successful commodity options trading requires many of the same skills as does successful commodity futures trading, the risks involved are somewhat different.  For example, if a customer buys an option (either to sell or purchase a futures contract or commodity), the customer will pay a “premium” representing the market value of the option.  Unless the price of the futures contract underlying the options changes and it becomes profitable to exercise or offset the option before it expires, the customer’s account may lose the entire amount of such premium (together with the costs of commissions and fees incurred to purchase such options).  Conversely, if a customer sells an option (either to sell or purchase a futures contract or commodity), the customer will be credited with the premium but will have to deposit margin due to its contingent liability to take or deliver the futures contract underlying the option in the event the option is exercised.  The writer of the option is however at unlimited risk with respect to the call option written, and risk on the put option of the amount should the price of the futures contract drop to zero.  Sellers of options are subject to the loss which occurs in the underlying futures position (less any premium received).  The ability to trade in or exercise options may be restricted in the event that such trading on U.S. commodity exchanges is restricted by both the CFTC and such exchanges, and it has been at certain times in the past.

Filed Under: Market Analysis, Metals, Options, Spreads, Strategies Tagged With: , , , , ,
December 8, 2010 by Leave a Comment

Reducing Portfolio Exposure to the US Dollar

This post is part of Craig Turner’s Innovative Trading Concepts series and originally appeared in FutureSource’s Fast Break Newsletter, where Craig Turner is a regular contributor on various futures trading topics.

Many investors and traders have too much exposure to the US Dollar.  Owning stocks, bonds, real estate and commodities priced in USD creates massive exposure to the US Dollar.  When markets crash, most asset classes are sold heavily and the US Dollar increases, in what is referred to as a “flight to safety” market reaction.  The problem for most investors is that they conduct all of their investments or trades in US Dollars, so when the Dollar goes up, the rest of the market is going down.  When the market crashes and you need diversification the most, most assets are sold and capital flees to the US Dollar.

Risk Management & Undiversifiable Risk

Any investor or trader, who has spent some time reading about risk management, has come across the terms “systemic risk”, “systematic risk” and “undiversifiable risk.”  These concepts are built around the fact you are always long assets, and you are long in exchange for US Dollars.  Furthermore, because your portfolio is always made up of “long only” positions, you are always subject to market collapses.

Your exposure to market risk does not have to be so extreme.  You do have options, and it is easier than you think to reduce your “undiversified risk” in your portfolio.  One way to reduce this risk is to hedge out some of your exposure to the US Dollar.  This will not hedge out all of your undiversifiable risk, but it will help should the market crash.  If you want to reduce your exposure to the US Dollar, then you need to buy the US Dollar Index futures contract.

Reducing Undiversifiable Risk through the US Dollar Index

The US Dollar Index is a futures contract that prices the US Dollar against a basket of foreign currencies.  This basket of currencies is made up of the 57.6% Euro Currency (EUR), 13.6% Japanese Yen (JPY), 11.9% Great British Pound (GBP), 9.1% Canadian Dollar (CAD), 4.2% Swedish Krona (SEK) and 3.6% Swiss Franc (CHF).

If you are long the US Dollar Index, you are long the US Dollar and short the Euro, Yen, Pound, Canadian, Swiss Franc and Krona.  If you are short the US Dollar Index you are short the US Dollar and long the basket of foreign currencies.

If your portfolio is made up of entirely long positions, bought in US Dollars, you can reduce your exposure to the USD through buying the US Dollar Index.  The long position of USD in the US Dollar Index will cancel out with some of the short USD exposure in the long only portfolio, leaving those positions long in terms of the basket of foreign currencies.

Example: Long Gold

Let’s say you are long 100 oz gold at $1400/oz in the futures market.  You are long $140,000 of gold priced in USD.  This can also be viewed as gold vs.  USD cross, or Gold/USD.  In order to buy gold, you had to use US Dollars, so you are long gold and short dollars, which can be represented as long the Gold/USD cross.

Now let’s say you don’t just want to hold Gold in USD.  You want to hold Gold in a mix of USD and foreign currencies.  Your long Gold position is a Gold/USD cross.  To hedge out the USD, you need to be in a position that is long USD and short something else.  If you sold the EUR/USD cross, you would be short Euro and long USD.  That would look like a long USD/EUR position.  If you combined USD/EUR + the existing Gold/USD, the long and short USD would cancel each other out and you would be left with just GOLD/EUR, or long Gold in terms of Euro.

GOLD/USD + USD/EUR = GOLD/EUR

Now that we have that concept down, apply it to being long Gold (Gold/USD) and long the US dollar Index (USD/(EUR+GBP+JPY+CAD+CHF+SEK)).  Long the US Dollar index at 80.000 is an $80,000 total contract value.  Lets combine our long Gold and long US Dollar Index position and see exactly what it turns into:

  1. Long 100 oz Gold at $1400/oz = $140,000 GOLD/USD
  2. Long 1 US Dollar Index at 80.000 = $80,000 USD/(EUR+GBP+JPY+CAD+CHF+SEK)

The second position is long $80,000 US Dollar Index.  That $80,000 long US Dollar in the second position will cancel out $80,000 of the $140,000 short USD from the first position.  That leaves us long only $60,000 Gold/USD and the other 80,000 is now long Gold/(EUR+GBP+JPY+CAD+CHF+SEK).

  1. Long $60,000 Gold/USD
  2. Long equivalent of $80,000 Gold in terms of EUR, GBP, JPY, CAD, CHF and SEK.

I am now long gold in a basket of currencies.  You can apply this method to any asset.  The US Dollar Index’s total contract value is a multiple of $1000 against the Index.  So if you want to hedge out $800,000 of USD exposure in your overall portfolio, all you need to do is buy 8 US Dollar Index contracts at 80.000.  80.000 X $1000 = $80,000 total contract value.  $80,000 X 10 contracts = $800,000.

This example not only works with an investment in gold, but it can be any other futures contract, stocks, bonds, etc.  All you are trying to do is reduce the net exposure you have to the US Dollar.  If you think about it, if your total financial portfolio is made up of things you have bought (stocks, bonds, real estate, etc) with USD, you have one massive synthetic short US Dollar position (Portfolio/USD).  That is why when the markets crash, your entire portfolio goes down.  Everything is sold while the US Dollar is bid up.

Why Investors and Traders Need to Hedge their US Dollar Exposure

You never know when the next financial crisis will occur.  You never know when we have the next flash crash or when the next European nation will default on its debt.  By reducing your exposure to US Dollar, traders and investors can reduce their “undiversifiable risk.”

While the US Dollar Index can hedge out $80,000 of USD risk when priced at 80.000, the required margin for the US Dollar Index is only $1729 per contract.  For a few thousand in margin a trader or investor can efficiently and effectively hedge out some of their currency risk to the US Dollar.

Some investors and traders I work with ask me why not just use put options for protection.  The problem with put options is they are a wasting asset.  The time decay on the puts makes it expensive to hedge against the unknown.  Futures are not a wasting asset.  If the US Dollar is trading at 80.000 noah, well w, and it trading at 80.000 three months from now, the P&L is $0.  Anyone who ever bought an option, had the price of the underlying go unchanged for a few months, certainly knows that their option will be worth considerable less because of the time decay.

Take Action and Protect Your Portfolio

If you are concerned about your exposure to the US Dollar and US assets, you need to talk to your futures broker and figure out the best way to hedge some of your exposure to the US Dollar.  If you don’t have access to an industry professional who understands hedging portfolio risk, give us a call at Daniels Trading and we will be more than happy to help you reduce your “undiversifiable” portfolio risk.

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Filed Under: Currencies, Current Events, Market Analysis Tagged With: , , , , , , , , ,
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