Buy Alert: January 26, 2015

| January 26, 2015

Buy Alert: January 26, 2015

 

Option Strategies:

Buy iShares Silver Trust (SLV) January 15, 2016 $18.00 calls for $2.00 or better.

Buy iShares Gold Trust (IAU) January 15, 2016 $12.00 calls for $1.30 or better.

 

Commodity Outlook: Precious Metals

No doubt about, precious metals are off to a good start this year.

In fact, silver and gold are the top two performing commodities thus far in 2015 with gains of 17% and 9% respectively.

Why the sudden bullish interest for two commodities that were left for dead last year?

It all comes down to Europe…

As you may have heard, the European Central Bank (ECB) announced a massive quantitative easing (QE) program late last week. The ECB plans on buying 60 billion euro of government bonds a month to stimulate the Eurozone economy. They’ll do it until at least September 2016.

What does the news have to do with precious metals?

Investors are speculating the stimulus will eventually produce inflation- lots of it. While the ECB is shooting for an inflation rate of 2%, there’s a distinct possibility they overshoot due to massive money printing.

If inflation eventually gets out of control, gold and silver will be highly sought after assets.

Remember…

The first time the US Federal Reserve announced a QE program in late 2008 silver traded for a mere $10 an ounce. Gold was crossing the tape at $750. By mid-2011, silver was trading over $40 and gold over $1,800- all on excessive inflation speculation.

Will such a bullish surge happen again due to the ECB’s stimulus action?

It’s unlikely we’ll see the same precious metals price explosion we did in 2010 and 2011.

However, there’s a very good possibility we see gold and silver start trending higher in 2015 as inflation wary investors increase their exposure to precious metals.

And if inflation truly starts to become a problem in the Eurozone later this year, we’ll be very glad we accumulated long-dated call options on the metals.

Speaking of which…

Here are two commodity ETFs that will benefit from rising silver and gold!

 

Resource ETF #1: iShares Silver Trust (SLV)

Short of owing the physical metal, SLV is the best way to profit from rising silver prices. When silver rises, so does SLV.

And here’s the best part…

Unlike many other commodity ETFs that use futures contracts, SLV holds physical silver stored in vaults. As a result, SLV simply tracks the per ounce value of that stored silver.

Here’s what we’ll do…

Buy the SLV January 15, 2016 $18.00 calls for $2.00 or better.

The current bid/ask spread for this contract is $1.70/$1.80.

Do not pay more than $2.00 per contract!

Our official entry price for performance tracking is $1.80. Your price may be higher or lower.

Exit Strategy:

iShares Silver Trust (SLV)

Remember, we want SLV to trade higher. Our first profit target in SLV is $24.00. As you can see in the chart above, there’s a price gap ranging from $24.00 to $26.00.

Our second profit target is $30.00. This is also an important long-term technical level.

Now keep in mind…

We’re using long dated option contracts with this trade. As loyal readers know, this is a departure from the norm for this service. We usually employ contracts with a four-month expiration or less.

But since I’m expecting plenty of volatility for silver in 2015, long-dated contracts are the way to go.

This is a patience trade that will benefit from the metal trending higher as the year wears on.

The risk control price for this trade is $14.50. If SLV trades below that level, conservative investors should consider closing this trade to preserve capital.

 

Resource ETF #2: iShares Gold Trust (IAU)

Much like the silver ETF above, IAU is a simple way to profit from rising gold prices. The ETF holds physical gold in various highly secured locations around the world.

When the price of gold rises, so does IAU.

Here’s how we’ll play a potential 2015 gold rally…

Buy the iShares Gold Trust (IAU) January 15, 2016 $12.00 calls for $1.30 or better.

The current bid/ask spread for this contract is $1.00/$1.15.

Do not pay more than $1.30 per contract!

Our official entry price for performance tracking is $1.15. Your price may be higher or lower.

Exit Strategy:

iShares Gold Trust (IAU)

Remember, we want IAU to trade higher. Our first profit target is $14.25, which is an area of long-term technical resistance. But if European inflation really gets worrisome this year, we could see IAU surge to our second profit target at $15.50.

Now, let’s be clear about what to expect from this trade…

Gold still has considerable technical resistance to overcome before bulls can really take control of the market. As a result, don’t expect the ride for gold (or IAU) to be a smooth one.

Plan on some short-term gold selloffs over the next few months as investors factor in newly arriving economic data.

In fact, I will likely introduce additional short-term trades in coming months that look for these pullbacks in gold.

Whatever you do, don’t forget the goal of THIS trade…

We’re looking for gold to slowly retake $1,400, and possibly $1,500, by year-end.

The risk control price for this trade is $10.90. If IAU trades below that level, conservative investors should consider closing this trade to preserve capital.

 

Category: Commodity Trading

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