The best prices are for gold

James Woodburn - Thu 11 May, 2006

...The best prices are for gold...Gold has surged to $700...It all suggests to me there's a lot of wind in gold's bull-run still yet to blow. Question is, when's the right time to get in?...When the profit taking comes in, (and believe me, it will), it’s going to be unexpected, and take the market by surprise with lots of professional selling...

The best prices are for gold

Gold has surged to $700.

And it's the result of two significant factors...

Firstly, an official at the Beijing Gold Economy Development Research Centre decided to pipe up yesterday and advise China to up the portion of gold in its reserves from 1.3% to between 3 or 5%.

Why's that so significant?

Because such a move would mean China gobbling up 1,900 tonnes of the stuff - equivalent to nine months worth of global production...

Secondly, the USA's cold response to Iran's letter of 'new solutions' to defuse nuclear tension also helped fuel the rally.

Talking to the Telegraph, metals trader Frank McGhee at Integrated Brokerage Services said: "No one is buying Iran's overtures. This is purely a geo-political move for gold. We've been here before. The difference is that this time, there are nukes involved."

The best prices are for gold: Renewed interest

I don't believe anyone should have been surprised that the US rejected the letter from Iran - most of all precious metal traders - but it has helped renew interest in the yellow metal...

May futures gained $21.60, to $699.40 an ounce. The most-active June contract did break $700, gaining $21.60 an ounce to $701.50, just off the day's high of $702.20.

Gold still remains below a high of $850 on the cash market - a London fixed price, set on 21 January 1980. On that date, futures hit an intraday high of $875 before settling at $825.50.

The best prices are for gold: Adjusting for inflation

But it's worth noting that if you adjusted for inflation, gold would need to trade to around $2,200 to match those highs.
 
It all suggests to me there's a lot of wind in gold's bull-run still yet to blow.

Question is... when's the right time to get in?

Back in 1996 Keith Cotterill, the brains behind the Resource Trader Alert service, steering his followers to a near 700-point gain when gold hit $647 per ounce, discovered the best way to predict a market’s movement and possible direction... and this indicator is called implied volatility.

Now don’t be put off by this technical term. Keith simply calls it froth in a beer glass.

And he insists it’s the only timing tool you will ever need. In fact he goes so far as to say that it removes the mystery from the markets completely!

How does his secret work?

Let me explain...

The best prices are for gold: The right time

Imagine pouring a bottle of beer into a tall glass. As you'll know from experience, if you pour a bottle of beer into a beer glass without tilting the glass you will end up with a glass full of froth.

And what happens to froth when you stop pouring and it hit’s the top of the glass? It gradually settles and then disappears.

And it’s the same in the markets, says Keith. Implied volatility is simply the ‘froth’ in the market.

Put simply, when the implied volatility increases by 100%, you can expect the professional buyers to sell, and the price of the commodity to consolidate before moving up again.

It's why Keith is closely watching the gold market. Here's what he said to his subscribers today...

"Gold prices are moving - that much we know for sure. They’ve moved considerably higher following the recent highs in the metal. So now what?   

The best prices are for gold: Trading plan

"My strategy – one that I have developed through trial and error over the past 15 years of trading commodities – is not to chase a move. The profit made on the last trade came as a result of using a tried and tested trading plan.  
   
"When you see news like this in the press – gold reaching levels not seen since the eighties - it’s easy to ask why we aren’t in it. I’m not surprised to have received a few emails on this subject.  

The best prices are for gold: Risk versus reward

"But you have to have patience with these markets. As I said last week, look for markets where there’s a new opportunity with a better risk versus reward profile.
This is a key requirement for trading any market.
   
"My long-term view on gold is that it’s going to trade above its all-time high of $850. When, I don’t know. But one thing is for certain: when the press starts talking about gold going to the moon, profit taking is on the way. Mark my words. And when that happens – you do not want to be caught on the wrong side of the market.
   
"As the legendary JP Morgan once said, 'When my barber starts giving me stock tips, it’s time to get out!'
   
"The news is there to suck in the weak longs so they can off load the professional sell orders. It’s called distribution. Once the profit taking is out of the way, we can then look to get back into this market - when the risk/reward profile is in our favour.
   
"Patience is the key."

The best prices are for gold: Professional selling

The implied volatility of the most precious of metals has continued to increase with this recent up move.
 
According to Keith, "if gold's implied volatility level reaches 34% it would show another 100% increase in the recent up move in gold's actual price, and bring about a potential end to the recent move in the metal."
 
He's remains bullish on the metal, but until there’s some profit taking in this market he'll stand aside.
When the profit taking comes in, (and believe me, it will), it’s going to be unexpected, and take the market by surprise with lots of professional selling.

And that's when you'll want to get in.


Regards,

James Woodburn
for The Daily Reckoning