We’ve seen major corrections in the metals markets since their peaks in March. While there has been sizeable liquidation in these markets, I don’t think the bullish trends in metals are dead, as evidenced by price action May 20, 2008, which put gold futures back at a four-week high. I recommend positioning for a rebound by year-end, as I feel the recent correction is nearing completion. Price action today is showing buyers are still interested, as gold futures shook off recent losses to trade back up above $920 an ounce.

Gold futures peaked at a record high above $1,033 in mid-March, and silver futures hit a high above $21 an ounce. But within a week of hitting those highs, major corrections ensued, and the market has been in consolidation mode. We’ve seen a large liquidation of fund money funneling out of the markets, and into markets such as equities, which have been rallying after a weak first quarter. The U.S. dollar likewise has been gaining some lost ground, due to interest rate differentials between the U.S, and Eurozone, and on ideas the Federal Reserve may be done lowering short-term interest rates here. While the dollar has bounced, I see it as a correction within the still-bearish trend, without much major upward resistance yet broken on the upside to indicate a major shift in trend. The long-term trend remains lower, and I’m not one to fight the trend. I’m not going to call a bottom or top, but go with the trend for now.

And, I also think inflation is going to stick around for a while, as evidenced by the price of crude oil, which has been hitting new all-time highs weekly, if not daily. June crude oil futures rose to another record Tuesday, May 20, above $129 a barrel. Higher crude oil prices have a big impact on our economy, which includes increasing shipping costs and therefore the cost of consumer goods. Increased inflation should lead to higher metals prices, as many investors see metals as a hedge against inflation, and a safe haven when the economic outlook is uncertain. The 0.4 percent increase in the core producer price index in April leads me to believe inflation is still alive and kicking. Who knows where the top is in crude oil…if it gets to $200 a barrel, there will be significant trickle-down pressures on our economy.

Trading Strategies

Looking at a strategy for gold futures, I would recommend bullish positions in futures and options. From a technical standpoint, the 200-day moving average at $834.10 has been holding as support in gold, and prices are consolidating a bit right now without a clear trend. With this reduced volatility, I think options can be bought at reasonable prices.

I recommend buying the December 2008 $1,025 gold calls for about $3,000, not including commissions. You can also consider or a vertical call spread, which would lower your cost, but also lowers your profit potential. If gold pulls back from current levels, I recommend buying futures at $885, with a stop at $850. You could also consider the mini-gold futures if you want to lower your cost to trade. The December calls give you time for the market to rally back toward previous highs, and I think we’ll see over $1,000 again before year-end.

For silver, I recommend buying the December $18 calls and selling the $19.50 calls, which would cost about $2,000 not including commissions, and offer a maximum profit of about $5,500, not including commissions, if our target is met and silver trades above $19.50 by expiration. I see silver rising to at least $20, if not at new all-time highs. We should see a nice pop in silver, and it could come quick.

As mentioned, money is pouring back into the stock market. However, I’m not sure the worst is quite over yet for the economy, and inflation may be the sticking point. The June S&P 500 futures failed to take out resistance at the 200-day moving average on Monday, May 19, and if it can’t pass that level, it leads me to believe the S&P could quickly fall back. Gold has in the past acted like a safe haven, and if stocks fail, I think more money will head back into gold and silver.

Feel free to call me for more details on these markets, or to tailor an approach for your particular goals and risk-tolerance.

Ben Kim is a Senior Market Strategist with Lind-Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-355-5757 or via email at bkim@lind-waldock.com.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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