8-28-2008
Jake Bernstein is now a regular Tuesday show located in the Video Section of the Ira Epstein & Company Website. More shows of this type are coming this fall.
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Hurricane Gustav
Gold and silver for the first time in a very long time have a series of events going for them.
- GDP growth in the US is stronger than many thought
- Due to the relative value of the Dollar to the Euro, US exports continue strong
- New geopolitical tensions between the EU and Russia, with the EU now threatening economic sanctions against Russia
- The idea now surfacing that Russia will invade the Ukraine
- Chinese factories beginning to open due to the close of the Olympics
- Iran notifying the world that it is beginning construction of a Nuclear Reactor
And... the approach of Gustav.
Hurricane Gustav will hopefully turn out to be a non-event, meaning it will miss the oil and natural gas platforms in the Gulf of Mexico. At risk are refineries and other energy structures all along the coast of Texas through Mississippi.
Should a direct hit of sorts take place and infrastructure be taken out, energy markets most likely rally, possibly dramatically so.
Destruction to energy infrastructure is not a smart gamble in my opinion as these things typically don't happen. Playing that it will is very risky. As such you should almost be playing what to do if Gustav is not as destructive as many think it will be.
In the aftermath of Gustav not being overly destructive, the premium that has been built into energy prices, which in turn dragged up gold and silver prices, will come out. If Gustav makes a direct hit, you know the impact will be sharply higher energy prices, which will pull gold and silver prices higher.
Next week's trading will respond quickly and directly to either of these two events. After that the fundamentals mentioned above will take center stage.
What Now for Gold and Silver
The big question now is what propels the markets going forward after Gustav.
I think you prepare for Gustav not being a devastating storm, which if I am correct on will create a price break in Gold and Silver and from that break, I look for a sustained year end rally to develop off of demand, not hurricane fundamentals.
Gold's Seasonal Story
A final pull back in prices into the very end of August is what should be expected. Look at the Seasonal Chart below provided to us by the good folks at Moore Research Center, Inc.
December Gold
Lets start out by looking at a Daily Chart of December Gold Futures
As mentioned in last week's letter, once the Stochastic Study lost its embedded status the upside price target was the 18-Day Moving Average of Closes, which has been hit. Now I expect market momentum to stall out a while, depending on what Gustav does or doesn't do.
Given the holiday and market mentality of making all of us become "weathermen" makes no sense to me. As such I have taken protective action.
As readers of my Weekly Metal Report know, last week we recommended purchasing December Gold $850 Calls and also took full profit on them. This was a very profitable trade for those who followed it.
What I did was recommend you take the profits in Gold and buy Silver Calls. Those as of this writing are doing well. I expect to cut the silver position down today, since I don't want to play Gustav with much of a position since it's the rare occasion where an event like the one being spoken about actually occurs.
This leaves in place the December Bull Call $1000-$1025 Spread that you own at 6.30. Those who own this spread are behind on it. However, those who followed my Twice Daily Trade Recommendations both entered into and took full profit on the Gold Calls mentioned in last week's Metal Report, banking more profit than the cost of this spread. Therefore, I want you to hold onto this spread.
This spread has until the end of November. If the seasonals in Gold and Silver take hold, or if Crude simply holds steady after Gustav's impact, the seasonal gains ahead could be very substantial. If I am wrong, your risk is limited to the cost of the spread plus fees. Don't forget that this strategy is not a do or die situation. You have the flexibility to get out at any time prior to expiration for whatever the spread is worth. Expiration is in late November, so you have a lot of time to see trends develop.
My recommendation at this time is to hold tight.
I receive a lot of questions on how I use Stochastics in my price analysis. I teach how I use them in my trading course called The Futures Academy. I've created a short video that explains my teaching style. In the video I speak about The Futures Academy and the indicators I use in my trade analysis. You can click on the image below if you are online or simply type the link address below the video image into your web browser.
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Let's look at the Seasonal Silver Chart to see what it offers.
Historically speaking its possible that today may represent the near term high in silver in terms of seasonality as prices had an "Outside Day Down", a chart pattern often associated with turn in market trend. If this proves to be the case, a move down is likely.
I personally think silver has a bit more going for it than Gold does as GDP and exports continue to grow and grow sharply. In addition, from a technical perspective, silver looks to "owe" a rally up to its 18-Day Moving Average of Closes.
Let's start off by looking at a Seasonal Chart of Silver as provide to us by The Moore Research Center...http://www.mrci.com/.
Let's assume Gustav proves to be a non-event. Silver should drop along with energy and Gold prices. Look at the spike low on the seasonal chart above. Boy, does that fit in if Gustav doesn't do the damage it could.
The silver lining, how's that for a pun on words, is this. From a seasonal perspective, this next price break is the washout that should produce a sustainable move up.
December Silver
Let's look at a chart of December Silver.
Stochastics came out of their embedded status on August 21st. Technically speaking, price and the 18-Day Moving Average of Closes, should hit each other after this type of event. Each day they do not, takes away some profit potential as the lower the 18-Day Moving Average of Closes moves down, the less available initial profit. That is what is taking place today.
As mentioned last week, I recommended and fills were made in the $15.00 December Silver Call at .600. A move up to the 18-Day Moving Average of Closes, where ever it comes in is the initial objective.
Today I recommended that partial profit, near .670 cents be taken. Via my Twice Daily Update, which I e-mail out, I will track this trade.
I remain bullish and think the influence of energy prices is but "noise" that is affecting the overall bullish trend in Silver. My goal is to NOT have trades remain exposed on this trade over the coming holiday. Rather, I will have them liquidate and hold the longer-term Silver Call Option Spread that I make mention of in my Daily Report.
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