EOT Trader Alert: January 6, 2012

  Buy GLD March 2012 $166 Calls at $3.05 or better

Company Background:

SPDR Gold Trust (GLD) is the largest and most liquid physically backed gold offering on the market.  And it does its job well.  By holding bullion, the fund offers investors the price performance of the spot metal.  GLD’s bullion is held in London vaults under the custody of HSBC Bank USA.

In addition, the most important fact to know about GLD is each share represents about one tenth of an ounce of bullion at the current market price.  This way, investors don’t have to worry about long-term tracking issues.

Short-Term Catalyst:

The time is now to get into gold!

It’s no secret, the US economy is still facing consequences from its many years of recklessness.  The government and private sectors simply spent too much money they didn’t have.  And now we’re paying the piper.

I believe it may still be years before the massive overhang of public and private debt is done taking a toll on the economy.  Meaning, these continuing headwinds will continue to impede the ability for America to get its fiscal house in order.

The market knows this, and as a result, gold prices are going up.

But there’s even more…

The responsibility to get our house in order lies with our friends at the Federal Reserve. They’re trying to fulfill their dual mandate of full employment and low inflation.

But no matter how hard they try, the Fed can’t succeed on its own.  And in the end, I believe the Fed will be forced into another round of quantitative easing.

No doubt about it, more QE means rising gold prices.

What’s more, gold has a great technical setup.

As you can see in the chart below, gold is continuously moving higher.  It was stopped over the summer by strong resistance around $1,550 per ounce.  But, by late August, gold was reaching new all time highs around $1,900 an ounce.

Shortly after reaching those levels, investors started selling.  Gold had obviously become overbought.  And this led to a sharp drop back to around the $1,550 level in October.

Since then, gold has been in a tug-of-war between buyers and sellers.

However, the important point… the long term uptrend in gold remained intact.

Look, even though gold briefly fell below the summer’s resistance level of $1,550 in December, it quickly resumed its uptrend.  That is good news for gold.

If gold had broken down in the midst of the rally before the end of 2011, it probably would’ve opened the floodgates for sellers again.

But it didn’t.

Gold bounced right off those levels with strong conviction, starting another run.  And I believe this uptrend is poised to continue for a while.

Bottom line…

Let’s buy gold call options now.  And the best way is through GLD.  Let’s get on board as fast as possible by buying the March $166 calls at 3.05 or better and watch them fly! 

Trade Details:

Exit Strategy:

GLD is trading at $157.20 per share.  Resistance levels will be at $170 and again at $176.  Don’t forget, we want this stock to move higher.  Support levels will be at $148 and $140.  Conservative investors should look to exit at the first support or resistance level.  Aggressive investors may want to hold for a bigger move.

Chart: