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The Beginning of a Gold Bear Trap and What Copper Prices Mean for the NASDAQ

Once again, gold is the big story. We’re seeing a fairly dramatic end-of-year liquidation, and it’s retraced so much that we’re almost entering bear market territory. I’m calling this the beginning of a bear trap: the trend followers are no longer getting long and are starting to get short—which in my mind is a buying opportunity waiting to happen. The question is, When do we pull the trigger? And how?

As you’ll recall, a few weeks ago we brought in Greg Hadley of Bull & Bear Institute in to give us an options strategy for long exposure to gold. He walked us through the Condor. This type of trade is great for when you have a strong opinion of where the market could go, but also like to have some wiggle room and get a high risk-reward ratio.

We’re about $70 lower in gold than we were then, but I still have a long-term upside bias. Of course, I’m also realistic about where we could dip in the meantime.  I believe it could see gold prices fall into the 1400s before it settles and starts to percolate back up. So I asked Greg to come in again this morning to give us another strategy for long exposure after the basing action takes place. As he always—and just like when he was trading for Warburg and Solomon Brothers—he came through with a wonderful play.

It’s the Simple Butterfly using calls: long the 1500, short the 1600 twice, long the 1700. As the market moves up, it goes past the long strike and moves toward the short strike. If it lands anywhere in the middle of that range we’re in terrific shape, and Nirvana would be right at that 1600 strike. I love it! And folks, anyone can put on a position like this—you just have to learn how to do it the right way.

As I’m watching gold correct, I’m also keeping one eye on copper. The fact that it’s not moving with gold or silver and staying right around the 3.3 level is key. Why? Because it’s the metal of choice for the high-tech world. And when copper’s doing what it’s doing relative to other metals—i.e., not liquidating—that tells me there’s an underlying demand on the tech side. When this type correlation happens, it often translates to higher NASDAQ prices over the course of the next few months. Let’s see if it holds true in this case.
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