December Gold is down $6.90 per ounce at $1049.40 this morning as I write. The enclosed chart shows that arguably, gold has gotten near term overbought, and was due for a pull back, as is happening today so far. I will be looking for places to add to our gold positions. The directional movement indicators are bullish, but narrowing, and the ADX line is rising. Typically in a strong bull market, corrections will last only a couple to a few days before resuming. I huge mistake that speculators do is to try to trade the corrections. Over the past 28 years that I have been doing this, clients who try to trade and make money on the corrections is where the most money is lost. I say, be patient, wait for the correction to run its course and get positioned with the trend. This pull back is good for our positions, because in the case of the $1030 to $1090 ratio call spread, prices were beginning to get to the upper strike price too quickly, which is not good for us. There are still 45 days left until December option expiration, so we need more time to bleed off before prices take off too far. Otherwise, we will need to possibly unwind that particular spread. That position is covered by other positions that we have on, so it isn’t that great of a concern.
Followers of this letter should have the following positions:
Long 1 December Gold futures contract at $1018.00.
Short 1 December Gold ($970 strike) call option at $58.00 per ounce. (December gold options expire in 45 days on November 23rd).
Long 1 December Gold ($1030 strike) call option at $25.50 per ounce.
Short 2 December Gold ($1090 strike) call options at $10.50 per ounce each.
Long 1 December Gold ($1100 strike) call option at $16.30 per ounce.
Short 2 December Gold ($1180 strike) call options at $8.40 per ounce each.
Long 1 February gold ($1270 strike) call option at an average cost basis of $5.00 per ounce.
Long 1 April Gold ($1275 strike) call option at $17.80 per ounce.
Short 2 April Gold ($1400 strike) call options at $9.90 per ounce each.
Oct. 9, 2009
David Hall
