Editor's note: This article was originally published on August 9, 2019 via Legacy Research Group.
Gold shot past $1,500 per ounce last week.
It's the first time the yellow metal touched that level in more than six years. And the Legacy Research inbox is packed with questions about what's next.
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So we turn to master trader Jeff Clark (Delta Report, Delta Direct, Jeff Clark Trader, and Market Minute), who shows us the one gold indicator that has "never been wrong."
Before we get to that, a first for The Daily Cut mailbag…
We get lots of questions about lots of topics here at Legacy Research. But I can't remember ever seeing one about natural gas.
So when I saw Pamela's question below, I knew we had to get it in this week's mailbag.
Dave Forest (International Speculator) and E.B. Tucker (Strategic Trader and Strategic Investor) provide the answers.
And apologies in advance to any natural gas bulls in the audience…
Reader question: What do you think about natural gas? Winter is around the corner.
- Pamela D. (Legacy Research member)
Dave's answer: Great question, and there are indeed a lot of interesting things happening in U.S. natural gas (natgas) right now. Recent data suggests that production from the Marcellus Shale - America's key natgas play - may have peaked and may now be declining slightly.
That should be a positive, but there's an X factor: the Permian Basin of Texas.
The Permian isn't a gas play. It's one of the biggest oil production plays in the U.S. But the oil comes tied up with a lot of gas.
Permian producers want the oil, and they get the gas no matter what. So, they've been nearly giving away the gas. In some cases, Permian gas prices have gone negative - meaning they are literally giving the stuff away.
Oil and associated gas production from the Permian have been absolutely booming in recent years. And low natgas prices have absolutely no impact on gas production there, because producers care about only the oil.
All that said, recent softness in oil prices could drop Permian oil drilling - and thus decrease gas production.
I'm watching this key area to see what happens. If it looks like Permian gas output is finally dropping, this could be a signal to jump into gas. But that would be a very aggressive speculation, and one I wouldn't be comfortable making with my own money.
E.B.'s answer: I don't like natural gas right now. There's too much of it, which means the price won't budge in a meaningful way until the market figures out how to use all of the surplus gas produced from fracking.
However, gas is more regional than oil. It's hard to ship. The price of gas in Japan, for instance, is far higher than in Texas, where there's a glut.
In Strategic Investor, we own the world's most powerful gas producer. It has a direct feed by pipeline into Europe. Without this company, Europe would freeze to death.
To date this year, the stock is up 57%, and it pays a big dividend.
So, while I'm not an overall fan of natural gas, I have found opportunity in the sector.
And now for Jeff Clark… and the gold indicator that's never been wrong in more than 20 years…
Reader question: Jeff, I know you posted several warnings on the gold and gold miners trade, including the "Mother Indicator." The gold market just keeps grinding higher, and I am kicking myself for being early on trimming positions and even selling covered calls. What is your current conviction in the gold sector? Thanks.
- Douglas J. (Legacy Research member)
Jeff's answer: Hi Doug. I'd rather kick myself for being early on getting out of a trade at a profit than for being late. It's far easier to exit a position when everyone else is lining up to buy it than to try to sell when the entire crowd is rushing for the exits.
The fear at this point, with the gold stocks continuing to grind higher, is that the gold sector may never pull back again. It'll just keep rallying and we'll never have a chance to buy back into the sector.
That's possible, I suppose. Heck, anything is possible. But it's not likely.
Commercial traders in the gold market - aka the smart money - have a knack for getting super-bullish on gold right near the bottom, and getting super-bearish right near the top. They're not perfect. They don't time the trades exactly. In fact, they're often a few weeks early.
But, in the 20-plus years I've been following them, they've never been wrong.
Last September, for example, when gold was trading near $1,200 per ounce, commercial traders amassed the largest bullish position on gold in the past 20 years. It took a few weeks before gold started to rally. But anyone following the action of the commercial traders was sitting on large profits by February.
As of last week, commercial traders had the second largest net-short position on gold in the past 20 years. Based on what happened this week, the "smart money" is early on this trade.
But I don't think they're wrong.
Gold and gold stocks are severely overbought. Commercial traders are bearish. I wouldn't want to buy into the gold sector given those conditions.
I like the gold stocks longer-term. But I expect we'll see lower prices for most of them over the next several weeks.
Jeff isn't our only expert with a strong opinion on gold.
If you want to hear what a gold industry insider has to say, be sure to read Wednesday's issue of Casey Daily Dispatch.
E.B. Tucker - the guy who back in December guaranteed gold would hit $1,500 an ounce by the end of 2019 - gives his thoughts on the current rally… and what comes next.
Side note: I'm just back from the Sprott Natural Resource Symposium in Vancouver.
It features more than 100 investment professionals focused on natural resources and precious metals, including Doug Casey, Nick Giambruno, Dave Forest, and E.B.
One of the most interesting things I noted was the optimism of every expert who took the stage. They all see gold going much higher from here… some as high as $4,500 an ounce.
That's 125% above gold's all-time high.
Moving on, a question about bitcoin for Jeff Brown. This one comes in response to Jeff's July 25 issue of The Bleeding Edge…
Reader question: I read your article on being in Washington, D.C., to discuss blockchain technology and the future of Libra. If Facebook has this type of user base, what keeps it from becoming the dominant crypto instead of, say, bitcoin? What effect does Libra have on the future of bitcoin?
- John B. (Legacy Research member)
Jeff is on the road right now, but here's the insider's take on Libra and bitcoin from Teeka Tiwari…
Teeka's answer: Facebook has nearly 3 billion subscribers that it'll now have to train on how to use its crypto coin.
Like JPM Coin, Libra is not a decentralized cryptocurrency. It will be under Facebook's control. But the fact that these two mainstream businesses are embracing this technology's terminology - and riding the coattails of the interest around blockchain - is very bullish for the crypto economy.
Facebook will be bringing crypto to mom and pop - a huge global audience that ordinarily wouldn't be exposed to it. You've got adoption of crypto by mainstream institutions and corporations ramping up… while bitcoin emerges from a bear market. It's a wildly bullish setup, in my view.
Last up in today's mailbag… a series of options-trading questions for the team at Teeka Tiwari's Alpha Edge.
William Mikula - the guy Teeka calls his "stealth income weapon" - takes the lead with some answers.
Reader question: For options trading with Alpha Edge, do you need to have the exact amount of funds in the account to cover the contracts for the options trade?
- Aaron H. (Legacy Research member)
William's answer: At Alpha Edge, we only sell cash-secured options. This means our potential purchase obligation is 100% covered by the cash in our account. So the simple answer to your question is yes.
But let's walk through an example…
Let's say we really like the prospects of the made-up company Palm Beach Inc. With shares trading at $10, we'll offer to buy them if they drop to a "strike price" of $9 per share. This is called "selling to open a put option."
When we do this, another trader pays us a premium to "insure" their shares. By paying us an upfront premium, she knows that no matter what happens, she has a buyer for her shares at $9.
In exchange for this promise, we must set aside $900 per put contract in our brokerage account. Options trade in increments of 100 shares, so it's $9 X 100.
By having the full $900 available in our account, we'll have the cash to buy 100 shares at $9 when the option expires.
Keep in mind, we only have to purchase these shares if they are trading at $8.99 or lower on expiration day. And if they are… great. We liked Palm Beach Inc. at $10. We like it even more at $9 per share.
And if shares are trading at $9.00 or higher on option-expiration day, we'll keep all the cash we earned from selling the put and have no further obligation.
Selling only cash-secured put options the way we do at Alpha Edge is a conservative - yet profitable - strategy. In fact, over the last year, we've enjoyed 39.6% average annualized returns… all while being able to rest easy knowing we had the cash to back our trades.
Reader question: I'm excited to start implementing the Alpha Edge strategy. There are two questions I have that weren't covered in the manifesto, training course, or trade recommendations:
- Jonah M. (Legacy Research member)
William's answer: I'm glad you're interested in our No-Money-Down Alpha Trades. That's one of our most popular - and profitable - strategies at Alpha Edge.
Here are the steps to put on a No-Money-Down Alpha Trade:
First, we sell to open a put option. (See my previous answer for more on that.) Here, we're agreeing to buy a great company at a discount to current prices. In exchange, we earn an upfront cash payout.
Then we take a portion of that payout and…
Buy to open a call option. This lets us profit when that underlying stock increases in price. And since we use the proceeds from our put sale to buy it, the trade has no upfront cost.
It's important for the "put sale" portion of the trade to execute first. This provides you with the cash from another trader to then buy the call option.
Many online brokers allow traders to enter both trades as one "spread trade" with a limit order. But for newer traders, this can add a level of complexity.
The easiest way is to sell to open the put option at the limit prices listed in our trade alerts… earn instant cash… then use a portion of that cash to buy the call option at our listed limit price.
If you don't follow these steps, you run the risk of the call option being purchased from your own funds. If the put option never executes, you're speculating on the stock's upside without a corresponding cash payout.
While the trade could still work out, it doesn't position you for the massive upside with no out-of-pocket cost that a No-Money-Down Alpha Trade does.
Moving on to your second question…
We do use stop-losses at Alpha Edge. But we do not enter them with our broker. Here's why…
Believe it or not, market makers are able to see stop-losses that are registered with brokers. This is an unfair advantage. I won't get into the nuts and bolts of the market mechanics. But entering a stop-loss with your broker is like playing poker with your cards face up.
That's why we track our 25% stop-losses offline. This protects our positions from any unusual or unscrupulous activity.
And rest assured, we are constantly monitoring our portfolio positions. And if we ever need to take immediate action on a position, we'll issue an alert or update right away.
That's all for today.
Have a nice weekend.
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