The bull market in commodities is far from over, in fact we are really still just getting started in the long run. Look for energies and metals to resume their leadership role in the near term as we close out this calendar year. The FOMC raising rates this calendar year is about as likely as the Cubs wining the world series (sorry to all my friends in Chicago but you know it’s true). The lack of a rate hike will send the Dollar lower and this will be one of the primary catalysts that moves gold back above $600.
Metals have been the leader of the overall strength we have seen in commodities. Since gold peaked earlier this year above $725, it has struggled. This struggle has formed a very attractive wedge pattern that you can see on both the daily and weekly charts. This wedge pattern is further complimented by the lower edge of the wedge being a very strong support level. It is very strong because it has been “tested” many times and thus far held up.
click on the chart to enlarge
Buy one December 2006 Gold 600 call and at the same time, sell one December 2006 Gold 625 call for a combined cost and risk of 5.00 points ($500) or less to open a position.
This trade positions us for gold’s move back above $600 while keeping risk at or below $500 and giving us a realistic chance at making 4 to 1 on our money.
Max profit, assuming a 5.00 point fill, is 20.00 points ($2000) and occurs at expiration with December 2006 Gold trading at or above 625.00.
Max risk, before commissions and fees, and assuming a 5.00 point fill, is $500. This occurs at expiration with Gold trading below 600.00.
Odom & Frey
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