“Goldilocks” Scenario Sets up 2017 Gold Option Sales
Good afternoon. This is James Cordier of OptionSellers.com with a market update for February 17th. From time to time in these updates I would like to talk about our current positions as well as any future opportunities we see coming down the pike. Today will be one of those days. What’s so interesting right now is a bit of a Goldilocks environment that’s starting to take shape. The U.S. economy is starting to lift up. The stock market, of course, is causing and creating a lot of aphoria right now for the U.S. economy over 2017 and beyond.
Of course, the stock market seems to make, once again, new highs practically every day with the idea of different types of stimulus; in other words, interest rates remaining low even though we’re looking at probably two rate hikes this year. The stock market, going up like it is, is leading a lot of investors and analysts to think that some of the Trump Administration ideas as far as lowering taxes and such is going to be good for the economy, and likely it will be.
The Goldilocks part of this is we do have a strengthening economy. We do have a lot of optimism right now about the stock market. At the same time, that is creating just a little bit of inflation, which will likely be tapped down by higher dollar values as the U.S. is probably the strongest economy of the 4-5 counties that we follow. Of course, India and China supposedly have a stronger GDP than the United States, but that remains to really be examined closely; however, as far as against the Japanese Yen, against the Chinese Yuan, against the Euro currency, the U.S. dollar is probably going to continue to be the strongest throughout 2017.
This Goldilocks environment that we’re referring to is probably making it slightly easier to look and forecast a 3rd quarter and 4th quarter price for precious metals. Of course, we are having an average short weighted price of $1,800 on the call side, where we’re short gold and we’re also long gold by selling puts at the $900-$950 level. This Goldilocks environment now is giving us ideas to project a year-end price throughout the end of the 3rd quarter and the beginning of the 4th quarter of approximately $1,300 an ounce, probably $50-$75 higher than where we are right now. This Goldilocks environment, in our opinion, is going to make the $1,800 calls that we’re short and the $950 puts that we’re also short a great opportunity.
We do see as the 3rd quarter later on this year does approach, we expect a lot of the options that we’ve recently sold over the last few months to probably reach just 10 or 20% of their current value. Possibly a very good time to buy them back or, in fact, if gold is trading around $1,275-$1,300 possibly just letting them decay very close to zero. It’s very interesting- if we have October gold options on, they expire in September. Chances are in July or August they will have lost a lot of their value. The December contracts that we are short, of course, they expire in November, and we would expect that in September and October. A lot of the premium will be out of them by that time, as well.
A $1,300 guesstimate for gold would put it probably some 50-60% below some of the calls that we are short and some 30-40% above some of the puts that we are short… kind of a sweet spot for year’s end. Of course, in silver we are short from approximately $30 and we are long from approximately $11. We could see silver probably creeping up towards $20 an ounce later this year. Very favorable environment for our strangles in both of our precious metals.
Going forward, we’re looking at several seasonals that we’ve applied recently. Our favorite one that’s coming up right now is being long natural gas. Generally speaking, supplies are at their least after the winter season and then they need to be built up going into spring and summer cooling season. We really like the idea of going long natural gas during the months of February and March and expecting prices to probably go 15-20% higher than where they are now. We have just recently been positioning and puts that are some 20% below the market we think that’s going to be ideal for 2017. Along with some of the other seasonal trades that we’ve applied recently, we’re getting, finally, a very good mix of commodities and a diversified portfolio is just weeks away, setting up for hopefully what will be a very good 2017.
Anybody wanting more information from OptionSellers.com can visit our website. If you’re not already a client and wish to be you can contact Rosemary at our headquarters and talk to her about becoming one. As always, it’s a pleasure speaking with you and looking forward to doing so again in 2 weeks. Thank you.