EOT Trade Alert – September 23, 2011

| September 23, 2011

September 23, 2011

Trade Alert:

   Buy GOLD December 2011 $80 Puts at $3.25 or better

Company Background:

Randgold Resources (GOLD) explores, develops, and operates gold mines in west and east Africa.  The company holds a 40% interest in Morila mine and an 80% interest in Loulo mine, as well as owns an 81% interest in Tongon project in northern Cote d’Ivoire.

Short-Term Catalyst:

Gold is losing its luster…

First off, investors are afraid the sovereign debt crisis in Europe will trigger another credit crisis.  And possibly destroy the European currency, the Euro.

What’s more, the global economy is in the grip of an economic slowdown.  And if things don’t change quickly, we could find ourselves in a recession before long.

As a result, investors are selling risky assets and pouring their money into safe haven assets.  And the king of all safe havens is still the world’s reserve currency, the US Dollar.

Not surprisingly, we’ve seen the value of the US Dollar skyrocket over the last month.

As the dollar goes up in value, it makes commodities like gold and silver more expensive in other currencies.  So, we’ll typically see commodities prices fall in dollar terms.

But that’s not all…

The recent stock market selloff is also causing a liquidity crunch.

It’s no secret large investment firms and hedge funds are using debt to increase their investing returns.  They’ve leveraged up thanks to the liquidity and cheap money the Fed is pumping into the financial system.

Everything is great until stocks fall off a cliff like they did this week.  Now investors are searching for liquidity.  They’re being forced to sell assets to cover margin calls. And one of the assets they can sell for a profit to meet these margin calls is gold.

Clearly, gold and silver prices are facing some serious headwinds in the short term.  And I don’t see the US Dollar’s rally ending anytime soon because the Euro crisis isn’t going away.

Here’s the bottom line…

If gold and silver prices continue falling, gold mining stocks are going to get crushed. Let’s grab put options on GOLD now to profit from the decline.

Trade Details:

Underlying Stock Symbol: GOLD
Current Bid-Ask Price: $2.80 – $3.10
Option “Buy Up To” Price: $3.25
Break-Even On Stock At Expiration: $76.75
Maximum Risk Per Contract: $325

Exit Strategy:

GOLD is trading at $95.30 per share.  Resistance levels will be at $105 and again at $111.  Remember, we want this stock to move lower.  Support levels will be at $85 and $70.  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

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