Buy Precious Metals on a Pullback to Profit From the Greatest Transfer of Wealth in History

by: Buzzworthy

The greatest theft in the United States' history has been going on for years. I am referring to the perpetual transfer of wealth from the lower and middle class to the elite. The budget deficit is out of control, and we are on target to hit the Treasury's Debt ceiling within 3 days. Either the budget needs to be balanced or the debt ceiling needs to be raised yet again. Congress will have to vote on this in the weeks ahead. This piece will illustrate a couple of of investment vehicles to help you profit from the times ahead.

Balancing the budget would require massive spending cuts across the board: Salary and wage cuts, layoffs, unemployment funds, medicare funds, etc... Should this happen, the obvious consequence is an immediate haircut to GDP, causing corporate earnings to contract and compress the stock market prices. It is doubtful that either the Democratic party or the GOP would want another stock market crash on their hands, further endangering already damaged pension plans and more specifically the brokerage house stock portfolios that manage their investments.

The more likely solution is to have the debt ceiling raised, consequently increasing our interest costs and flooding the system with more dollars. This is the more likely scenario, and has been apparent in recent months as inflation runs rampant with investment houses pouring dollars upon dollars into commodities like oil, corn, wheat, and our dearly beloved Precious Metals.

Debasing the dollar decreases the buying power and intrinsic value of dollar denominated investments. This is the government's way of being able to more easily service their debt by printing dollars to pay interest on the debts we already owe to China, Japan, et al...

Because I doubt anybody on Capitol Hill would want to deal with an uprising due a stock market crash, I favor the latter solution over the former. For this reason, I'd like to point out the continued destruction of the dollar, as well as the resulting increase in prices of Gold & Silver. Want to participate in the greatest transfer of wealth in history? Then buy Precious Metals on a pullback. Call me crazy, but I favor the miners over the paper metal ETFs right now, despite my fairly large GLD call position.

/DX (Dollar Index Futures)

Note how /DX barely even bounced off the year lows, it fell right off the shelf without a noteworthy retrace and fell to new lows yesterday. /DX also continues to obey some downward trendlines based off fibonacci fans.

Gold/GLD (GLD gold paper ETF)

Gold has continued to obey a clearly defined uptrend channel. Since October 2008, the metal and ETF have cleared multi-month resistance and broken to new highs. Any pullback to 140 could become support as the 140-level was strong resistance for months.

/SI Silver Futures

Silver is currently the hot trade, and the crown jewel of the Precious Metals. I was made aware of amazing silver streaming and mining companies like Silver Wheaton (SLW), First Majestic (NYSE:AG), Endeavour Silver (NYSE:EXK), and Great Panther Silver (NYSEMKT:GPL) earlier this year. I've been in and out of the leveraged silver ETF AGQ several times since February, and the gettin's been good, in fact, it's been great. Silver has been on a meteoric rise, and if history is any indicator, we know that no parabolas end well. I am exercising extreme caution with very tight stops on my silver position.

Now if only my miner positions would play catch-up to the metals... I suspect the lagging miners are a pair short trade, as funds long the metal they short miners as a hedge. However, this will add fuel to the fire when the short squeeze occurs, and I'm confident it will. Hanging on for the ride on a trade and believing in a trade 100% is the toughest part. Risk management is key. Silver's chart looks bullish, following the uptrend channel beautifully. However, RSI and MACD levels are getting oversold, so a short term top and consolidation could be in the cards. A breather / pullback in silver would be healthy, otherwise we're looking at a blow-off top, which usually precedes a sharp correction or collapse in the price. Pay attention to the volume, as it indicates panic buying.

If you don't have access to futures trading, the best move here is buying calls on SLV. The call options would provide you with similar leverage, magnifying your returns rather than just buying the silver ETF SLV. If you don't trade with options, AGQ (leveraged version of SLV) provides you with the leverage you need to generate phenomenal gains. Be warned though, AGQ is a very fast mover so you need to be nimble and be prepared to take profits quickly. The reason AGQ is my preferred vehicle other than the silver future is because AGQ's underlying asset is the Silver Futures contract. AGQ is merely a derivative of Silver Futures. If you can handle stomach churning swings, consider AGQ calls for additional leverage. I've traded AGQ calls with 100 to 300% intraday swings.

Below are the option chains for SLV, I recommend the $50 strike calls. Note that people are willing to pay a hefty premium due to an increase in Implied Volatility (IV) for SLV options. Also noteworthy is that 18,095 contracts traded yesterday against an open interest of 23,751. That's 76% the total interest traded yesterday alone! Someone clearly has an interest in SLV hitting $50. Caution though, as there was also someone on the other side of the trade selling the calls to this big buyer. Who will be right remains to be seen.

July 2011 SLV Call Options

45.00 SLV110716C00045000 4.95 0.00 N/A N/A 7,771 29,485
46.00 SLV110716C00046000 4.40 0.00 N/A N/A 2,609 6,153
47.00 SLV110716C00047000 3.90 0.00 N/A N/A 3,294 7,598
48.00 SLV110716C00048000 3.50 0.00 N/A N/A 1,645 4,610
49.00 SLV110716C00049000 3.15 0.00 N/A N/A 1,040 7,015
50.00 SLV110716C00050000 2.80 0.00 N/A N/A 18,095 23,751
51.00 SLV110716C00051000 2.41 0.00 N/A N/A 6,130 4,354
52.00 SLV110716C00052000 2.16 0.00 N/A N/A 1,939 6,531
53.00 SLV110716C00053000 1.87 0.00 N/A N/A 1,760 1,363
54.00 SLV110716C00054000 1.78 0.00 N/A N/A 1,377 2,174
55.00 SLV110716C00055000 1.57 0.00 N/A N/A 5,193 21,278

The Silver Futures Chart

Royal Gold (NASDAQ:RGLD)

I established a position in this miner on the breakout to new highs on volume. I purchased shares and the $60 calls. I won't go into the fundamentals or build a bullish case at the moment, but here's the chart for now. Notice the fibonacci fans, there seems to be some gravity and a relationship with the trendlines. I'd like to see a pullback to former resistance and to see it transform into support for a spring-loaded launch. Below are the call options for RGLD. Since RGLD is a little bit of a slower mover relative to its peers, I recommend going out to October contracts to give the stock enough time to gather some momentum.

RGLD Oct 2011 Calls

60.00 RGLD111022C00060000 5.00 0.00 N/A N/A 26 4,732
65.00 RGLD111022C00065000 3.00 0.00 N/A N/A 11 763
70.00 RGLD111022C00070000 1.70 0.00 N/A N/A 34 178

Happy trading, and don't forget to keep tight stops, as silver is a volatile beast.

Disclosure: I am long RGLD, GLD.

Additional disclosure: RGLD and GLD calls