Plays On Gold

• February 11, 2002
• Dave Floyd

Today’s
column will address two different areas of the trading world. The
first section will discuss some intermediate term (multi-day to multi-week)
trades, while the second half of the column will deal with the traditional
intraday setups I discuss each day. What I find interesting is that the theme
discussed in the first section is applicable on an intraday basis as well.

Gold? Believe it or not, gold does
appear to be the investment of choice in the current market environment — with
controversy brewing over corporate accounting, the Japanese accumulating gold at
a feverish pace as bank deposits no longer receive state protection resulting
from bank failures and just the age-old dilemma of demand outstripping supply.
Even the ever-so-timely business channels are taking notice. Is it just another
blip in the much blighted previous 10 years of gold performance?

Traditionally, gold has outperformed
in the context of the weakening dollar, a quick look at a chart of the dollar
index will quickly show that this is not the case this time. As a result the
current rally in gold may be indicative of a “flight to value” vs.
“flight to quality.” However, if one kept a close eye on the corporate
bond market last week, you would have noticed that the spread between corporate
bond yields and treasuries widened measurably, form 20 to 300 basis points. An
aversion to corporate bonds would not be good for the dollar.

America’s current account deficit has
been funded by overseas inflows into the corporate bond market, thereby
supporting the dollar. The recent rise in yields on corporate bonds suggest that
investors confidence has been rattled. In the event that the dollar comes under
pressure, it may offer further reasons to be in gold. (The overvalued dollar is
a very old argument, technically the dollar looks strong, so until something
dramatic changes, it is hard to position your portfolio against it.) However,
always being aware of developments on all fronts makes one better prepared to
profit.

Another interesting observation is
simply that gold stocks are tradable again intraday. This has not
occurred to my knowledge since I started day trading back in 1994. Granted
they will not give you the volatility that an IBM or
BRCM will,
but nevertheless they are beginning to show signs of range and liquidity
intra-day. Stocks like Newmont Mining
(
NEM |
Quote |
Chart |
News |
PowerRating) are worth looking at. As
of this morning, Prudential Securities has downgraded NEM, I do not know the
details, but figured I would pass it along.

Even J P Morgan
(
JPM |
Quote |
Chart |
News |
PowerRating), the embattled
investment bank and large gold derivatives player, is a play on gold. Just last
week there was a rumor that their short position in gold took a big hit when
gold broke above and held $300 / oz. Even if this rumor is untrue, JP
Morgan has plenty of other negatives against them (Argentina and Enron), which
is why the stock is an attractive short. In fact the recent bounce took place
off a critical support level of $28.95, a break of that level again will only
invite further gains on the short side. Given that JP Morgan is actively
traded, it offers good setups intraday as well.

Fundamental analysis as we all know is
next to worthless if your timing is off, hence the need for technical analysis,
or if there is no catalyst. In this case however, the technicals are supporting
the case for gold and gold-mining shares. The prospects for the dollar are merely
an observation, but one that may provide another “timing / catalyst”
piece for gold traders and investors.

Looking ahead to today’s session, I
expect the usual stocks that have been active over previous sessions will
continue to be actively traded. Stocks like Tyco,
IBM and Elan
have offered multiple intraday setups for the last couple of weeks.
Additionally, the market is still wrestling with many technical support and
resistance levels which have also offered great setups. I suspect that this week
will again provide the observant and nimble trader many good trading sessions.

Key
Technical Numbers

Thought For The
Week:

Always
plan and anticipate your entry and exit points, never react to the markets when
making a trading decision.

As always, feel free to send me your
comments and questions. See you in TradersWire.
Have a great weekend.

Dave