It’s amazing what the MSM ignores these days.
The PBOC raised the Yuan exchange by 0.0005 and that microscopic move set off a panic that dropped the Yuan it’s daily 0.5% limit against the Dollar – marking a huge and violent reversal to the recent trend and signaling that China’s usual tight control of their economy may be starting to unravel. Chinese banks scrambled to buy Dollars to meet a Central Bank rule that bars them from having Dollar short positions overnight but it’s doubtful that all were able to comply in that violent action.
The Shanghai Composite fell 1.5% this morning (Hong Kong was closed) but it does not show up in the charts on the WSJ’s main page nor is it mentioned on CNBC – perhaps because it conflicts with the weak-Dollar narrative they are using to drive the speculative commodity frenzy. Ignoring problems in China was a big theme of the summer of 2008 – as we rallied into the second biggest stock market collapse in history from Dow 11,000 in mid-July to 11,782 on Aug 11th and we were still testing 11,600 through Sept 1st but then things started going wrong as we broke below 11,000, then 10,000, then 9,000, then 8,000 – finally stopping at 7,500 (down 33%) on Nov 20th.
Special Report: How to Make Millions in Metal and Oil:
As I keep telling Members, we don’t have to be worried about missing a sell-off, it will be long and relentless when and if it comes as will the rise we get as inflation begins to kick in. Gold is now over $1,500 for a week and, before you waste money on gold – let’s look at an alternative: GLD is the ETF that tracks gold and, if you think Gold is going to $1,600 – rather than plunk $1,500 down on an ounce of gold to make 6.6% on a move up, you can buy the GLD $140/160 bull call spread for $790 (1 contract spread at $7.90). As GLD is currently at $146.74, that spread is currently $674 in the money and carried a $116 premium BUT – for about 1/2 the cost of an ounce of gold, if GLD gets to $160 (approximately $1,600 an ounce) then that spread is worth $2,000 – a $1,210 gain on that same $100 move up in gold!
What’s the catch? The catch is the same leverage you gain on the way up goes against you on the way down. Your break-even on gold is about $1,530 so you enter the trade at a disadvantage. On the other hand, since you make 12x on the way up, look at it as risking $790 instead of $18,000 on 12 ounces of gold to get the same upside on a move to $1,600. If you are worried about missing on the upside, you can “layer” the trade by buying the $145/165 spread when gold crosses $1,550 and the $150/170 spread when it crosses $1,600 so you only have to commit the next $790 after you have already locked in gains on the previous round.
By playing gold this way, if gold goes to $2,000, you would end up with 10 spreads that cost you about $8,000 that return $20,000 whereas buying $15,000 worth of gold at $1,500 would give you a gain of just $5,000 – IF gold goes all the way to $2,000. This is the kind of money options traders make when there’s inflation and that’s why we’re so gosh-darned excited about it! On the way down, we can also make exceptional money as the metals crash and, in fact, the gains are so spectacular that we can also layer our hedges so we make money on a big move in either direction – this is why GS and company have so much fun jacking up and then destroying the markets over and over and over again – it only hurts the little people, right?
Let the Glenn Beck crowd run around buying physical gold, the more demand from them, the more money we make. We can set up similar spreads on silver and copper as well as – OIL! Nothing is more exciting than oil these days and you can similarly use options to gain tremendous leverage on the price of oil. In fact, back in December, I put up my “Secret Santa’s Inflation Hedges” and our oil hedge was using XLE to make the following trade:
Buy 2 XLE Jan $55/60 bull call spreads for $2.60 ($520)- Sell 1 XLE 2013 $50 put for $4 ($400)
The total outlay on that spread was $120 per set and that trade was supposed to run for the year but XLE is already at $78.98 and the Jan $55/60 bull call spreads are now $4.50 ($900) and the 2013 $50 puts are $2.40 ($240) for net $660 off the $120 entry for a nice 450% gain in just 4 months – now THAT’S how we stay ahead of inflation!
Rather than messing around on the NYMEX with a 1,000-barrel oil contract that would have set you back $90,000 in December and would be up to $112,500 today (up $22,500 or 25%), just $5,000 worth of the spreads would have returned the same amount while $90,000 would be $405,000 already – more than enough to gas up the new Range Rover! We’re actually betting oil to go the other way now so I hate to put up a bullish trade idea I don’t believe in but, if you MUST play oil defensively bullish – then:
USO July $43/47 bull call spread is $1.70 and you can sell the USO Jan $35 puts for $1.30 for net .40 on the $4 spread with 1,000% upside if USO gains 5.6% (oil about $120) and USO hasn’t been below $35 since November, when oil was $85.
What I love about these inflation plays is that they are self-hedging. If your family is going to spend $5,000 on gas this year ($100/wk) then your risk if oil falls below $90 is you will own USO at about $90 for $3,500 for 100 shares but, a fall of 25% in oil prices will save you $1,250 so you are good for almost a 50% drop from there and if USO drops another 50%, then oil is $45 and you save another $1,500 so you pretty much can’t lose to the downside (and you keep USO until the next time oil spikes) BUT – IF USO goes HIGHER and gets over $120, then your $1,200 cash commitment turns into $10,000 and you have FREE GAS or, in the very least – the increase is offset, right?
These are very basic hedges that anyone can do – including airlines – to lock in prices. Of course the same layering strategy can be used if oil moves higher but keep in mind, as I said, we’re shorting oil at $113 ($112.50 is our cross line in the Futures!) as we don’t believe the average consumer, who has no ability to hedge, can afford to carry this expense for very long. You can spike oil up to any price you want for any BS reasons you want but, eventually, you have to sell it to the masses – the same masses that can’t afford to pay their mortgages or grocery bills but, unlike a mortgage – you do need money to buy gas and you can’t go 6 months in arrears….
IN PROGRESS
