Gold


Silver Wheaton has had a pretty strong pullback right into support over the last few days. I was fortunate enough to sell some of my position, and write calls against my position above $10.50. I have been an advocate of the stock in the past, riding it from its lows to the recent highs. I still continue to like this company. I like the long term fundamentals of precious metals, and in particular silver more than gold.

Today spot gold traded below $920, which has been decent support over the last week, but when GLD tried to break through 90 on the downside, it quickly reversed and took out the morning highs. I really like SLW in front of this $7.50 level. Gold is still in a bull market, and the longer we can consolidate above $900, the more explosive the move will be to the upside.

I’m playing this two ways:  Buying the stock outright, and selling put spreads.  Most recently I sold $10 September puts and bought $7.50 puts, and expect to make the spread in them in the coming months.

SLW

Gold has been steadily climbing the last few weeks.  Some fundamental reasons for its climb has been growing concerns over inflation, growing concerns over deflation, concerns on the the ability for the Euro to act as a reserve currency, and concerns over possible US bank failures.

The weekly chart, posted below looks very good.  It has formed a massive bull flag over the last year or so, which is good news for the bulls.  I think fundamentally gold is strong.  Gold in terms of US dollars has actually been lagging all over currencies.  Gold has broken to new highs against almost every other currency in the world.

Some points of interest to me are not just the $1030 high, but also the $990, where it failed last Summer.  On pullbacks I would expect gold to hold above $930 to prove real strength, and $890 a little lower, although I would prefer it not violate the higher level.

One interesting point to note:  large gold miners such as ABX, AEM, GG, and NEM have not followed the commodity into this last upmove to the 980 level.  This could be telling us that a meaningful pullback could be in store for gold futures.  Nonetheless I will be looking to buy into weakness instead of shorting into strength.  We could be witnessing the beginning of a multi-year bull run.

 

 

Weekly Chart

Weekly Chart

On the last trading day of 2005, I decided to make a bet on gold. I have dabbled in commodoties in the past, but have been scared out of my positions too early in almost all instances. This time was different. I decided to go long on the April contracts. So far it has paid off. I’m up more than 500% since my purchase on the 30th. This is all due to leverage. As the contract price has risen, I have not maintained my leverage with it. This is because I have been holding it overnight and do not want to be wiped out off my account because of overnight action.

I may increase my leverage at some point during the day, but I will be sure to be out of the position before the end of the trading day. So far, 2006 has been a great year.

 

I saw the movie Syriana on Sunday, and it really gave me a different perspective on the financial markets. I have read some articles, and have decided that it is time I begin to learn commodities trading. I had opened an account back in September and even had cash sitting in there waiting for me to start investing, and so I figured today would be the perfect day.

I had traded crude oil, on the hopes of the hurricane that was coming after Katrina would not be downgraded to a tropical storm. I bet the wrong side of that equation, and closed out my position at a couple point loss.

This time, I decided I would trade gold, as it has been climbing as of late, and has been more volatile. With the Federal Open Market Committee making its anouncement on whether or not to raise interest rates today, I figured it would move the gold market more than any other commodity.

I started my position by opening up a long position for Feb06 at 527.255 and a short position for Apr06 at 530.90. After noticing that I wasn’t going to be going anywhere with this all day because both securities advanced and declined in tandem, and after seeing continuous downward movement in the morning, i decided to sell the Feb06 contracts at 523.10, for a loss of 4.155 per ounce.

I figured I would try to regain ground by holding the short position as the price of gold moved lower. It was then that the price starting moving against me. After watching the chart for a little while, I finally covered at 527.995, making 2.905 per ounce and offsetting the loss generated by my previous trade.

By just watching the graph, I knew I’d be able to trade out of the loss and into the green. So I re-bought into the Feb06 contracts at 523.80 and then sold half at 525.90 and half at 526.00. This wasn’t my strategy, I just had not adjusted the number of contracts on the trade screen by accident. So I made 2.15 per ounce on this trade.

After these trades, waiting for the Federal Open Market Committee anouncement, I was up .9 per ounce on my trades (2.15+2.905-4.155). My gut feeling was that gold was going to go lower because the interest rates were going to be raised and the wording towards futures raises would be changed. I felt this would drive the price of gold down, since investors and speculators would be taking money out of gold and putting it into US dollars.

So I sold Feb06 contracts at 524.10 2 minutes before the anouncement, expecting the price of gold to decline. The FOMC raised a quarter point, and changed the wording, exactly as Wall Street had anticipated. But when I saw prices begin to rise, I panicked and thought I made a mistake. I bought at 524.80 for a loss of .70 per ounce.

I then turned around and bought 20 Feb06 contracts at 525.00 thinking it was going to go higher. After thirty minutes of trading down, I decided to close out the position at 523.40, losing 1.60 per ounce. Those last two trades had completely wiped out all my gains from the morning.

If I had held onto the contracts I sold at 524.10, I would have made some good money considering gold closed at 521.60 today. I will definitely have to not second guess myself, and the only reason, I know I did, was because this is a new market for me. The leverage is alot higher, so the gains and losses will be alot more extreme.

I plan on going into leverage and risk in the near future and why I think its a great tool, especially for younger investors. I will also continue to trade commodities, as I feel there is a great opportunity in these markets once I understand the movement in them a little better.

One thing I have noticed thus far is that while investing in company stock is for the long term in that you can hold onto them for months at a time, commodities are the exact opposite. The volatility and prices fluctuate second to second. To be honest, I like them both, and I feel I will be just as successful trading commodities as I am with stocks.