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Today's Featured Article
Natural Gas: Look Before You Leap
All one has to do is look at the Weekly chart to see why so there has been such a buzz about the Natural Gas. I have fielded quite a few calls from investors asking if it was time to go "all in" and get long. This market has many believing the time is now for a sharp correction to the upside. However, upon further study, caution is truly warranted here. First, let us take a closer look on the weekly and then daily chart of the natural gas contract.
 If you cannot view the Weekly Chart,
go here.
 If you cannot view the Daily Chart, go here.
As we can see, this market has already corrected 50% from the 2008 highs, and more than once. This is not rocket science, we are not telling you anything you may not already know. Do not get caught up in the hype, and in the noise. Always do your homework before committing a position to such a volatile market
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Now, let's talk about the other factors of the day. First and foremost is the fact that NG inventories are running extremely high. Nat Gas inventories are 10% ahead of last year. As long as that is the case, it will be difficult for this market to mount a sustainable rally unless the other factor, which is weather, changes considerably.
There has yet to be a major push of that cold Artic air invading the Midwest and beyond. Watch the weather, a forecast of extremely cold weather with a large area of coverage should generate a nice pop to the upside, and help to create an environment that will let you trade this market in two directions. However, with such a large build up in inventories, we think the rallies will be short lived. Eventually something will have to give, but until we get a good long term blast of cold weather, we expect the rallies to be limited.
For those out there however who do not want to miss a sudden change in the market, a dip in inventories perhaps coupled with a cold forecast, buying Call options may be a nice way to participate. Starting with the Jan 2010 options, you have 35 (34 after today) days until expiration. The Jan Nat Gas today is trading near the 476.0 level at 3:00 pm central. The Jan 500 calls settled today at 220, which would cost $2200. The Jan 550 Calls went off at 93, which would be a cost of $930. There are a couple of schools of thought here. Spend a bit more for a closer to the money Call (like the 500 call) and if this market rallies you will get a much nicer return. Or, buy multiple units a
bit further out of the money. If the market were indeed to take off, you could offset a portion of your position for a profit and cover some (or all on a really impressive rally) of the cost of the remaining contracts. Of course there are many ways to approach options. We will stick with the basics, in this case owning Calls when expecting a rally.
If you are still convinced despite everything that this market will rally, you can buy at the money calls. Sticking with the Jan, the 480 calls went off today at 299, or $2990 per unit. This strike was actually in the money today.
You can also go out to the February expiration, and you will see that a Call will cost you more than the same January strike price as you will get an extra 30 days for the market to move in your direction.
Remember that when owning options time is not your friend, neither when paying for it, or losing it. So if you decide to buy Calls, remember that the clock will not stop ticking, and that expiration day is always a day closer tomorrow.
Gold Bubble?
Once the GOLD market reached the $1,000 level again on September 8th, the market has seen a steady move higher in prices as the December GOLD closed at $1,169.20 today. There are many different factors why the GOLD market has been moving higher in recent months, and there are many reasons for the market to continue to climb to $1,300 and then $1,500.
The main reason Gold is moving to new highs one could argue is that the supply of money in all world currencies is increasing much faster than the supply of GOLD. There are estimates that the US Dollar expanded 7 to 10 times faster than the GOLD supply in 2008. Who knows what that figure will be for 2009. In the U.S. alone the Treasury Department is faced with many issues including much increased national debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to rise in the future if and when the FED believes the financial catastrophe has passed.
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Once these interest rates start to rise the Treasury is going to be faced with the same issues that caused overstretched homeowners to default on their mortgages. There are estimates that the U.S. national debt is over $12 trillion, and the White House predicts that the cost to service the debt will increase dramatically in the next ten years even if the annual budget is shrunken, which many find hard to believe. With these increased costs the Treasury will have to print up more fresh money and in the process devalue the US Dollar even at a quicker pace than today.
There are people that argue GOLD should not be moving higher because inflation has remained in check over the last several months and some economists even mention the word deflation to defend all the money that has been printed in the last year. As a research company put it, " so far the massive expansion of the FED's and other central banks' balance sheets has not affected inflation due to the scale of de-leveraging and slower money velocity"
"Typically, increases in the money supply base find their way into the M2 money supply with a lag. While the FED is hoping that once the patient begins to recover, it will withdraw the liquidity, experience suggests this will be difficult to do."
It would be reasonable to assume that there is a great risk of significantly higher inflation in the next couple of years, and many different investors, funds, countries, and even now Central Banks are now looking to purchase their insurance policy (GOLD) in case of any currency defaults, mainly the US Dollar. There were reports in the last month that the Central Bank of India purchased 200T of Gold, and there are always steady rumors / confirmations that the Chinese are looking to accumulate more GOLD without causing the prices to spike higher.
The hard part now is to try to get long in a commodity market that has moved $200 higher over the last two months and seems overbought on a technical level. If you have ever traded in the GOLD market before, you will remember how quickly the GOLD can drop $100 in the drop of a dime and take out all the longs' hard earned profits quickly and painfully. Obviously the best strategy to get long in the GOLD market would be to wait for that $50-$100 drop and then start to nibble to the long side once the market has sustained its decline for a few days. However, many gold investors that are on the sidelines as well are waiting for this same break, which might be months away. Recall last year
when Crude Oil went from $60 to $150 and all the while economists were calling for a top in the market the whole way up.
As long as the US Dollar remains weak and the FED has not actually raised interest rates, consider buying GOLD on quick $10-$20 dips, placing stops below strong support areas. Also pay attention after key government reports to get long gold on quick dips off these reports. Always use a stop in case the market decides to plunge at any point. Mini GOLD contracts are 1/3 the size of a COMEX contract and are recommended for any trading account under $20,000. Investors from around the world will continue to look to purchase gold in any form (futures contracts, ETFs, coins, bars) as long as currencies around the world continue to print new money.
There will definitely be some bumps along the way in GOLD's quest to reach $1,300 to $1,500. Carefully watch December Gold's first notice day on November 30th (Monday) to find out how many investors are looking to take delivery of the gold contract. More deliveries than anticipated can send the GOLD up to its next target of $1,190.
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About the Author
Bill Borkowski is a retail broker at Dorman Trading, LLC. A 12-year veteran of the futures markets, Bill has traveled around the country doing the seminar circuits. Bill works with clients of all kinds, offering support to online as well as full service traders. |
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