EOT Trade Alert – March 16, 2012

| March 16, 2012

March 16, 2012

Trade Alert:

  Buy GLD June 2012 $154 Puts at $3.00 or better

Company Background:

SPDR Gold Trust (GLD) is the proxy for the spot price of gold bullion.  It’s the most liquid and trusted ETF used by investors for trading the price of gold.  For investors unable (or unwilling) to purchase physical gold, GLD is the single best option on the market to trade in and out.

Short-Term Catalyst:

After an epic run, gold is about to take a turn for the worse… much worse.  On the way down, we’re going to see gold retest its recent low of 1,500 set back at the end of December.  In fact, GLD reached a low of $148.27 on December 29th, not even three months ago.

Here’s why gold headed lower…

Gold is used as a hedge for inflation and also as protection against the devaluation of paper currencies.  And for most of the past two years, both have been big concerns for investors.

You see, as interest rates fell in the US, the odds of inflation were much higher.  As money is cheap to borrow, demand for goods rises… causing inflation.  Therefore, when interest rates are low, inflation odds are very high.  The problem is, US inflation hasn’t spiked with these very low rates.  Well, at least how the Fed calculates it anyway (that’s a different topic).

In addition, the US Dollar had fallen to multi-year lows over the past year.  However, with the recent positive economic news, the US Dollar has rallied.  And with that, commodities have fallen in price.

Once again, a cheap dollar values commodities higher.  But when it rises, they become more expensive in relationship.  And the US Dollar has put on quite a rally.

The big reason gold is setting up to fall is simple… QE3 is looking less and less likely.

As the US economy improves, we’re seeing less and less reason for the Fed to roll out a true QE3.  And if we don’t see QE3, we’re going to see the greenback surge even higher.  Before you know it, interest rates will be climbing as well.

Let’s buy some GLD June 2012 $154 Puts to capture gold’s move lower in the coming months…

Trade Details:

Underlying Stock Symbol: GLD
Current Bid-Ask Price: $2.66 – $2.69
Option “Buy Up To” Price: $3.00
Break-Even On Stock At Expiration: $151.00
Maximum Risk Per Contract: $300


Exit Strategy:

GLD is trading at $160.91 per share.  Resistance levels will be at $170 and again at $180.  Remember, we want this ETF to move lower.  Support levels will be at $150 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.



Category: EOT Trade Alert

About the Author ()

Comments are closed.