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The Monthly Gold Report with Metals Bonus
James Mound
JMTG's Head Analyst
Jul 7, 2005
I have been writing about gold
for sometime now, and those that followed me long from 250 and
went short with me at 450 understand that for two to four week
stretches the market can make a false move, but the longer term
shifts are definitive and pronounced. Over the past several weeks
gold has seemingly diverged from its inverse correlation with
the US dollar, but I wait patiently. The dollar correlation is
alive and well and showed itself last Friday. I maintain the
short view in this market, not because I am stubborn, but because
I am right. So I begged you to short it at 420 and the market
nailed us for $20. The bottom line is if you bought puts like
I suggested you would still be in the game. Up until last Friday
puts in gold were the best value play around, and they remain
a solid approach to play continued downside. There is a bit of
a problem, however. I am not the dollar bull I once was at 80
or even 85. The dollar is the main price determinate in gold
and will be for some time. The next few months may paint a foggy
picture, but it is getting clearer. The euro makes up over 50%
of the US dollar index, and the euro is oversold and due for
a bounce. The yen is playing catch up and everyone knows when
the yen is cheap the Asian buying demand that supports gold disappears.
The initial phase of China gold buying is in decline. The overall
outlook suggests that a channeled dollar and a turning point
in the euro/yen relationship can still push gold below $400.
The monthly saucer/arch formation is broken, and using technical
history as a guide, these formations can often lead to devastating
reversals when they fail.
*Chart courtesy of Gecko
Software's TracknTrade.
Silver broke through critical trend line support and
lacks upward momentum. I am impressed, however, with the inexpensive
call options available in the market and recommend an inter-market
hedge by buying gold puts and silver calls. This strategy would
require a couple of months in time on the options for an effective
volatility play. Alternatively for the more aggressive bear trader,
you could sell silver futures and buy calls as protection (for
example, sell one silver futures at $7.00 and buy two August
720 calls for $500, then roll into September calls when the August's
go off the board). The daily volatility can easily provide winners
on both sides if you keep your strike prices close and keep your
time frames tight. All the silver to $50 prayers for Hunt Brother
Part Two out there isn't going to help this market. There have
been times over the past couple of years where all the sellers
in silver evaporate and short covering rallies ensue. For example
the last run to $8.50 had that feel - like you couldn't pay someone
enough to sell their silver. But the sellers came back, on the
heels of a gold failure, and I haven't felt that nervousness
since. When silver makes several intraday recoveries from 20
cent down moves and also holds onto a couple of 20 cent up days
I might get bullish, but until then silver is a sell.
*Chart courtesy of Gecko
Software's TracknTrade.
If I may interrupt myself for
a brief aside on silver. I listen to all types of customers and
traders who hoard physical silver and gold and for the most part
they fall into one of two camps. The first camp falls for the
chaos theory and thinks currency is for suckers and raw and precious
metals will be the future because the world as we know it is
coming to an end. The second camp says a shortage of physical
deliverable silver will cause a rush to the market for delivery
thereby igniting an explosive surge in silver prices. There is
a part of me that can empathize with the first argument because
the world is getting seemingly more screwed up every day, and
the idea of our impending doom has a growing argument. Nevertheless
I stopped the acid trip a long time ago and I can't for second
wager my financial well being on the egocentric view that this
will happen in my lifetime or my family's. As for the second
argument, about the shortage, you are missing a big piece of
the puzzle. Those that bite on this viewpoint see the ever declining
inventory and increasing usage of raw metals through the US inventory
reports that are freely available to public. And, after your
E=MC2 calculation, you figured out that we will eventually
run out of the stuff. Of course, everyone else sees the same
thing you see so you must be telling yourself at this point that
it is only a matter of time before the market wakes up and smells
the coffee, right? Not to burst your bubble, but huge hoarders
of physical silver like Warren Buffett, Bill Gates, Michael
Dell, George Soros, etc. don't keep their metal in US storage
and are not required to report it. So, the moral of this story
is looks can be deceiving and what appears to be a shortage is
more like a squeeze in the making - which, by the way, is not
such a bad thing for you silver bulls out there. But a squeeze
like that doesn't mean you need to have physical possession of
silver - you will be just fine with your undeliverable futures
contract at $20/oz because even if they can't deliver you will
get paid. If you don't believe me call the exchange and ask them
yourself. Meanwhile you are missing out on leverage, short term
plays, option protection and/or speculation - all the while paying
a nice transaction premium and delivery and storage costs, all
just to show your buddies your coin collection - but I digress.
Platinum prices have remained at an unusually high premium,
and while fundamentals are hard to come by, the market is technically
begging to fall. Palladium on the other hand, almost entirely
controlled by Russian influence and hidden supply, offers a technical
buy for the patient trader. I believe that buying three palladium
for every short platinum is a great spread trade for the next
several months.
Copper is struggling to hold on to these outrageous highs,
but keeps bringing in the suckers on these fake downshifts in
the market. I beg you - do not falter or wane in your struggle
as you are on the right path. The dollar strength coupled with
declining demand from China is setting up a turning point in
the near term. This may well be a long term bull market, but
in the near term I expect sub 130 prices. Short futures with
stops above 165 or create a synthetic futures play by buying
an OTM put and using a short OTM call to pay for it.
Jul 6, 2005
James Mound
JMTG's Head
Analyst
email: info@Moundreport.com
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Charts Courtesy
of Gecko Software's TracknTrade
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