Opportunity Knocks

by James Sinclair, Dec 31/02

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This is one of the times that we hope for a reaction in the sense of the opportunity it will carry. We do not wish any displeasure for our gold community members that believe in holding a full position at all times. That approach is now more palatable because we have resolved the Golden Teacup bullishly. It is reasonable to assume that with a completed base under us, gold has significantly more points and time on the upside.

You are all by now quite familiar with the major areas of support on the downside. They are the same areas of resistance we overcame to arrive at the $354.50.

They now stand below us functioning as stop signs for the decline.

1st $338 to $343
2nd $328 to $332

Here is my plan: Technical Words are defined at the end of the article. Those not familiar with trading and options please review the dictionary below before reading further.

For shares I intend to purchase call options on a scale down as each support area is approached. My interest is only in those gold share situations that outperformed on the recent run up. Since I believe that the recovery from this reaction is very close my purchases will be in partially, in the money, call options. As an example Royal Gold (RGLD) has been a front runner during the last rally. RGLD was so powerful that it overran its upside target by two dollars before temporarily topping out in an overbought condition. RGLD has both January and February listed call options trading. My strategy is to lightly purchase in the support areas for gold bullion the February call options on a scale of price down for at the money options. That means I will lightly place buy orders for in the money call options between today's low and $18 per share as the strike price using the gold support prices for timing. At the same time I will be watching my RGLD-PDT (power down trend line) for any break to the upside, even intra-day. Should the PDT line of RGLD break to the upside, I will buy in the money RGLD call options for the January month maturity. This is pure trading strategy and has nothing to do with investment.

Now that gold has bullishly resolved the Golden Teacup I am prepared to be in the trading business full time. It is a simple business. Look at it as you would look at running a candy store assuming the candies changed price. I had a full cabinet of candies (gold shares, gold share calls and gold bullion) for sale a few weeks ago but my store had no clients. My store filled up in recent days with many people and they all wanted candy. I sold all the candy I wanted to sell (1/3 of my core position) on a scale of appreciating prices above what I paid for it until my candy cabinets were empty. Lo and behold, the prices of candy have fallen. The candy distributors (seller of gold shares, listed options on those shares and bullion) are now coming in to my store so I am starting to buy my supply of candy back. Just as I sold my inventory of candy at appreciating prices, I am prepared to buy back an inventory of candy at depreciating prices.

There is no difference between running a candy store and trading a trend. Assuming we now have an up trend in gold of significant duration (I do), then you open your candy store. You know what you are willing to spend for your inventory. You buy scale down and when you have completely restocked your planned inventory, you STOP. That is the discipline that must be adhered to.

Assuming I am correct and next week the store fills up again with people wanting to buy my candy, I will sell them my entire inventory (equal to no more than 1/3 of my core position). This is something you might repeat many, many, times over the coming month.

Before the break out above $330 you noticed we sold before we bought. Successfully accomplishing the pre-$330 breakout strategy not only increased our profit, but gave us staying power in the reactions that caused so many to fall into deep depression. Now, I am suggesting a more aggressive policy, not of wild speculation, but rather of running a Golden candy store starting with this reaction.

Remember the discipline says you will not over commit yourself in taking your inventory. You will look at that inventory when taken in as inventory only to be sold, not as gold.

Listed Call Option: This is an instruments whereby you have the right to receive 100 shares of a gold stock but you do not have an obligation to take it.

Premium: The price you pay for the right to receive the 100 shares of gold stock.

Strike Price: In this case the price at which you would receive the 100 shares.

In the Money Call Option: A call option with a strike price lower than the last sale of the stock itself.

At the Money Call Option: A call option with a strike price equal to the last sale of the stock.

Out of the Money Call Option: A call option with a strike price below the last sale of the stock.

Maturity: For an option the month and day when the agreement must perform or it lapses.

Listed Option Market: Constant bid and asked price similar to the manner in which the stock itself trades whereby you can buy or sell your call option anytime during the market hours of the exchange upon which the option is traded.

Support: Areas of previous highs or lows which will function subjectively in the mind of the market much like a stop sign does for cars that obey traffic rules. Twice now gold has stopped its decline in this reaction within the $338-$343 area.

Resistance: Areas of previous highs or lows which will function subjectively in the mind of the market much like a stop sign for cars that obey traffic rules. Now $348 and $354.50 are resistance areas.

Scale Down Purchases: Placement of bids at progressively lower levels. The amount you buy increases as the price decreases.

Scale Down Purchases at Support areas: For options this means waiting for gold bullion to enter intra-day into the areas of support. Then I enter in my buy order either in the stock or in the call option for the stock from the present price it is trading at on progressively lower levels and increasing size.

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