Monday, September 24, 2012

Investor Gold Buying to Resume & Fed Doubling Their Balance Sheet AGAIN!

A leading precious metals consultancy, Thomson Reuters GFMS, has forecast that investors will buy record amounts of gold in the remainder of 2012. GFMS produces the benchmark supply and demand statistics for the gold market. GFMS forecasts that investors will purchase 973 tons of gold in the second half of 2012, more than during the wild gold market of the summer of 2011. This surge in demand for the yellow metal, GFMS says, will move gold above the $1850 an ounce level, not far from the record high of $1920 hit in September 2011.

GFMS may be right. This past week, gold hit its high for this year at $1790 an ounce on the back of the various global stimulus plans launched by a number of countries around the globe. Primary among the recently announced stimulus plans was the Federal Reserve’s QE3 or as some in the market have called it, QE infinity. Philip Klapwijk of GFMS said that, for the gold market, “QE3 has become talismanic”.

The Federal Reserve said it would purchase $40 billion a month in mortgage-backed securities indefinitely. In addition, the Fed will continue Operation Twist – the buying of longer dated U.S. treasury notes and bonds. When all is totaled, the market is looking at about $85 billion a month in government bond purchases for an unlimited period of time.

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The main characteristic of QE3 that drives the gold market is the fact that the open ended purchases of all of these Treasuries will be financed by money that does not yet exist! And it’s not just about a fear of future inflation being ignited by all this money creation. It’s a very logical move higher by gold based on recent history of Fed actions and gold prices.

Even ignoring Operation Twist, the Fed will add $40 billion a month, or $480 billion a year, to its balance sheet. If one looks at the Fed’s own website, you will see that it shows current assets of $2.8 trillion. Add $480 billion annually to that and in about five years the Fed’s assets (the foundation of the money supply) will have nearly doubled.

That is exactly what happened in the last five years too…the Fed’s assets doubled. And in what should not be a surprise to gold investors, the price of gold also doubled! For the past decade or so, gold has tracked the increase in Federal Reserve’s assets. Do not be shocked if that pattern continues over the next five or ten years too.

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Chris Vermeulen

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Tuesday, September 18, 2012

Has the Arab Spring Effected Crude Oil Prices?

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Crude oil prices hit a four month high this week on the back of rising tensions in the Middle East and North Africa and the unfortunate murder of the U.S. ambassador to Libya. Added impetus on the upside was given to oil by the announcement of more money printing (QE3) by the Federal Reserve which said it would launch an open ended commitment to purchase $40 billion of mortgage backed securities monthly. The global benchmark for oil, Brent crude oil, jumped to about $117 a barrel.

It maintained its roughly $18 premium to U.S. based WTI crude oil which was trading at $100 a barrel on a couple days ago. Non futures investors can easily participate in the oil market through the use of exchange traded funds. The ETF which tracks Brent crude oil futures is the United States Brent Oil Fund (NYSE: BNO) and the ETF which tracks WTI crude oil futures is the United States Oil Fund (NYSE: USO). The real story behind the story in the oil market, however, is the ongoing Arab Spring which is sweeping throughout the Middle East and North Africa, pushing aside some regimes and threatening others.

The countries whose governments, such as Saudi Arabia and the other Gulf states, feel threatened by popular uprisings are where investors should put their focus. Saudi Arabia in particular is key because it accounts for more three quarters of the world’s spare oil production capacity. So it is very important to note that the kingdom is no longer a price ‘dove’ in OPEC as it has been for decades. It has joined Iran, Venezuela and others in being a price ‘hawk’. The reason behind the change in attitude is simple…Arab Spring. Like its neighbors in the Gulf region, Saudi Arabia has gone on a public spending spree to appease its restless citizens.

It has sharply increased outlays on subsidies for items like food, fuel and housing in an attempt to appease its citizens. In 2011, the kingdom raised its domestic spending by $129 billion – the equivalent of more than half its oil revenues. Much of this increased spending will go toward upgrading the country’s infrastructure. Take electricity, for example. Saudi Arabia has revealed plans to spend more than $100 billion dollars on power plants and distribution networks by 2020. The kingdom has also set a goal to electrify 500,000 new homes that are being built in an attempt to mollify political unrest among its population of 27 million people.

This spending spree led the International Monetary Fund and other analysts to estimate that the kingdom and other Gulf countries need oil to be selling between $80 and $85 a barrel in order for the governments to balance their budgets. This is up, in Saudi Arabia’s case, from a mere $25 a barrel a few short years ago! Unfortunately for oil consumers, this trend looks set to continue in years ahead.

According to the Institute of International Finance, by 2015 the Saudi government will only be able to balance its budget if oil prices are at $115 a barrel if current spending trends remain in place. So in effect, with the Arab Spring forcing governments to spend more on their citizens, it has put a floor under the price of oil. OPEC will do everything in its power to keep the price above the budget breakeven points for governments in the Gulf region.

Keep up to speed on the oil and precious metals markets 

Chris Vermeulen

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Thursday, September 13, 2012

It starts now....the OptionsMD Mentoring Program is LIVE!

Doc Severson finally opened the doors to his much anticipated OptionsMD Mentoring Program! And you need to act quickly because it''s the LAST time he's opening this program to the public this year!

Doc is so confident in his program that he's giving you the opportunity to try it out with a 1 Year, 100% Money Back PLUS an Extra $500 Performance Guarantee!

As long as you take this course seriously, you really can't lose...

So if you're unhappy with your current performance and are looking for a way to make consistent monthly income, it's really a no brainer.

Just click here: OptionsMD is LIVE!

Happy trading,
Ray C. Parrish
President/CEO The Stock Market Club

P.S. This is one of the most comprehensive mentoring programs you'll find anywhere on the planet! Without a doubt, people WILL be talking about this one ....

Monday, September 10, 2012

Volatility is back, but on the upside...is it time to buy silver?

The price of silver reached a 5 month high this past week as investor interest seems to have been rekindled in both gold and silver as belief in financial markets increases that the latest round of monetary easing from the Federal Reserve, QE3 , will soon be on its way. Many investors had largely stayed away from silver in recent months after some had got caught up in its volatility. Silver had touched a 30 year high in April 2011 before plunging 35 percent in a few short weeks.

Now the volatility is back, but on the upside, as prices have climbed more than 20 percent in less than a month. The gains have outpaced that of gold which rose roughly 10 percent during the same time frame. Importantly for investors, the ratio between the two precious metals has moved about 10 percent in silver’s favor since mid August. This is the first time silver has outperformed gold since the start of 2012.

For non futures investors, the two precious metals can easily be tracked through the use of exchange traded funds (ETFs). The most liquid ETFs for the two precious metals are the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) respectively.

Silver Bullion Spot Price


Gold Bullion Spot Price



You can take a look at my long term outlook analysis from last week here "Gold Standard to be Reinstated Through the Back Door"

Some may wonder why has silver outperformed gold in the past several weeks? The answer goes deeper than just confidence that QE3 is coming soon, but it is still rather a simple one. The sharp rally in silver was fueled largely by short covering. That is, some investors (hedge funds, etc.) had made rather large bets that silver would continue falling and were caught off guard by its recent rise. According to data from the Commodities Futures Trading Commission, the silver market during the week of August 27-31 saw the largest amount of short covering since May 2011. At the same time. Bloomberg reported that hedge funds were the least bullish on silver in almost four years.

It is unknown for how long silver will outperform gold. But even some long term fundamental investors such as legendary commodities investor Jim Rogers has said that he believes silver right now is a better investment than gold. He points to the fact that historically gold has been worth about 12 to 15 times what silver is worth, but that recently it has been worth roughly 50 times silver’s value. Silver is also the only major commodity not to have reached a new all time high in the decade long commodity bull market and is still cheaper than it was 32 years ago.

So it may be worth a look. But since silver is so volatile, wait for a downward spike before initiating or adding to a long position.

If you would like to get my weekly analysis on precious metals
and the board market join my free newsletter at www.TheGold&OilGuy.com

Chris Vermeulen


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Wednesday, September 5, 2012

My buddy Doc is really ticking Some people off today

Doc Severson, is making some really big waves...

He just came out with a video presentation that's probably going to tick off a lot of people (especially if you're still struggling to make money trading and investing).

But I've got to say, he makes a REALLY good point...Click here to check out the video that's raising all the fuss.

Seriously, you've got to check out this video, it's a real shocker!

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Ignoring Liquidity is a Recipe for Option Trading Losses

One of the traps for budding options traders is to attempt to apply various strategies to any underlying that exhibits a familiar technical pattern. This is a mistake. Option trading strategies must only be applied to underlying assets that have very liquid options.

To attempt to trade thin options puts the trader at serious risk of the situation the Eagles described in their signature song. You may be able to negotiate reasonable prices to enter the trade, but your exit will not reliably be so easy to exit due to low volume levels and generally wide bid / ask spreads.

So what are the bench marks that allow the new trader to recognize what are liquid options and what are not? Perhaps the easiest fundamental characteristic of an option that is liquid is to glance at the bid / ask spread of the front series option at-the-money strike. These strikes will almost always be the most active series and have the tightest bid / ask spread.

In the modern world, that spread should be 6¢ or less for “normal” priced stocks such as XOM, CAT, or GS. For “super size” stocks such as AAPL, GOOG, or AMZN spreads are a bit wider but typically around 25-30¢ or less.

In stocks with lower price points that have very liquid option series such as XOM and INTC, it is not uncommon to see markets quoted a penny wide during periods of relatively calm markets. However, and this is an important point, in times of market turmoil, the spreads typically widen much beyond their normal size. In severe market turmoil the spreads may reach a point even in liquid underlying assets that precludes any semblance of reasonable ability to execute trades.

The higher-priced underlying assets such as GOOG, because of their characteristically wider spreads, are more easily executed at negotiated prices in which the bid ask spread is reduced. This is particularly the case on multi legged positions; the spreads usually give the counter party, in this case our beloved option market makers, a straightforward way to hedge their risk. For this the trader will often be given a discount.

The rule of thumb for calculating this discount is to reduce the aggregate bid / ask spread by one third. A corollary of this is not to waste your time trying to negotiate out the total 2 – 4¢ spread that may exist in the most liquid series. Ultimately these strategies will not work – the market maker’s kids need to eat too.
Let us look at a practical example of what might be an appropriate starting point. Consider GOOG, one of our super sized stocks that recently trades on average a bit over $33 million of options per day.

GOOG has recently climbed to multi year highs in a parabolic move with a very aggressive angle of attack and currently trades a bit over $678 / share. It may be ready for a pull back or at least a period of price consolidation before resuming its course.

For those who agree with this hypothesis and may be considering an actionable idea, consider the September 680/685 call credit spread, a bearish play. This spread is constructed by selling the September 680 call and buying the September 685 call. As is readily apparent from the option chain, the bid ask / spread for each of these is 30¢.

To introduce another term useful for options traders, consider the “natural” price of this spread. You would sell the 680 strike at the quoted bid, $14.10 and buy the 685 strike at the quoted price of $12.10 for a “natural” price of $2.00 credit. The aggregate bid / ask spread for this is 60¢ – the sum of the spread for each of the two legs.

Using our rule of thumb to expect a 33% discount on such spreads, we should be able to execute the spread for a net credit of $2.20 ($2 plus one-third of the 60¢ spread). This obviously increases our net credit and potential profitability by 10% and would result in significant improvement of trading results over a series of similar trades.

Just so you have seen an example of an options board in which the Hotel California syndrome could be expected to occur, consider the pricing in this option chain for symbol STRA:

As you can see, the spreads for the 65 strike, the current at-the-money strike, are in excess of $1. Stay away from these sorts of traps; the only one who can make money with any reasonable probability is the market maker.

The point of today’s missive is that you should choose carefully the field on which you wish to play. Careless selection of the underlying to trade can put you at a significant disadvantage regardless of the attractive chart pattern of the underlying stock in question.
Happy Trading!

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J.W. Jones

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