Just when investors were becoming disgusted with shriveling prices, April gold took a bounce off 41250 support and has continued to show surprising strength when compared with associated commodities and financial markets. In the post-Iraqi election euphoria, many thought gold would continue testing new lows with a possible probe below $400/ounce before the April expiration. Indeed, I was concerned that our short April 450 put would gobble up all our collected premium on the short 450 call/put straddle.

I adjusted our put protection to take advantage of the increase in our long April gold 425 "wing" used as protection, replacing it with the long 410. This may prove beneficial if gold prices continue firming.

Gold dropped from approximately 45000 to 41000 after the extended December upward channel. Interestingly, the midpoint of this range is where we are currently. Technically, a breakout above 43000 implies a retracement all the way to 45000. (Wouldn't that be nice?) Gold must definitively overcome the 40-day moving average at 42790 in order to have enough technical momentum for a breakout.

Assuming gold settles within the 42250-43000 trading January range, the 40-day average will converge on the price and technical congestion will build. This means a technical signal could be generated at a price lower than 42790.

Keep in mind that we have collected 2380 in combined premium net of the protective wings. This means that we are making money on anything above 42680. Ideally, we want to see a breakout above 43000 resistance and a 45000 test.

Commensurate with gold is the new crude oil strength that has taken April futures from almost 4500 to more than 4900. Once again, interest in the $50 calls abounds. Many believe that crude oil is leading precious metals upward and forcing the dollar lower regardless of U.S. interest rate differentials.

Caution is in order. Gold and crude may represent mixed signals. As the Fed raised short-term rates, the dollar is exposed to greater demand and hence, higher parity against the Euro. If the economy is gaining momentum as the statistics suggest, the Fed's track will remain the same. Hence, my assertion that notes and bonds will follow. From there, the dollar should gain strength. Eventually, crude oil and gold should reflect lower dollar parity by declining in price.

Of course, crude oil relies upon more than simply dollar parity. The recent sabotage of Iraqi oil pipelines accentuates the problem and, hence, the exposure. The damage was minimal. In fact, oil did not have any significant initial reaction. This implies that the bulls are not particularly trigger happy.

The chart has periodic similarities to gold in that rallies and busts correlate even if the exact patterns do not. This goes back to my discussion of the overall dollar premium that is built into most global commodities. Crude oil tempts me back toward the credit spreads or ratio spreads. Are we taking too great a risk by assuming $50/bbl. will remain resistance?

I will examine the option values as we approach the close for either the ratio or credit spreads. As of this writing, the May crude 50 call was quoted at 2.10. The 51 was about 1.00 on the screen, but the actual transaction would be less or the floor would steal the trade!

When the last unemployment data was initially digested by traders and investors, the knee-jerk reaction was a pop higher in bonds and a stall in the dollar's progress against the Euro and yen. Moreover, gold reacted lower and the consensus was that the number was a "dismal showing" in comparison for expectations of a 200,000-plus jobs increase.

However, upon further reflection, analysts concluded that 150,000 new jobs at this time of year and under the presumed economic conditions were not as dismal as preliminarily thought. Thus, markets adjusted accordingly. Yet, in so doing, we have received some mixed signals that require sorting out if we want to progress in the right direction.

If there was ever a trading range chart, interest rate contracts have exemplified one. Notice the powerful 111'00 support in combination with a series of oscillating highs held just below 113'16. It is fair to presume 113'16 is the current cap on values and hence, rates will not decline below this level. The intrigue entering this market last week was over the increase of the former 112'00 support from where prior tops were conceived. Last week's action had a 112'16 fulcrum to suggest that the 113'16 resistance might be challenged.

As new mortgage rates poured out over radio waves, T.V. ads, and internet spam campaigns, the 10-year abruptly lost upward momentum. So, the new 10-month low in fixed mortgage rates had hardly a moment to breath before being snuffed out by a retreat back to 112'00 support.

So far, my assessment that the spike was a last hurrah from a market that must eventually adjust to the short end of the yield curve seems correct. After being removed from the market the week before at breakeven, I opted to re-enter despite the fact that we remain short March 111 puts in combination with short 113 calls. Why not lift the puts? Indeed, it might have been wise to cover the puts to remove the exposure and the cap on our new short position.

The question is whether the put will go significantly into the money before expiration. However, my goal was not to capture every possible profit potential. We have collected 1 7/64ths on the call/put strangle. The assumption was that the 113'16 resistance and 111'00 support would hold through February. Since the Fed won't make any interest rate changes in the interim, the only influence upon this range comes from economic news similar to employment data. I believe the 2 16/32nd range can absorb reactions to such news as we have seen to date.

In the event we see a bust below 111'00 support, I believe the transition on the long end will be in place and new lows can be achieved before March futures expire. The move could easily extend into the June expiration. As I have frequently mentioned, there is a seasonal tendency for rates to rise into the spring and as the April 15 tax deadline approaches. Demand for funds increases into June and this has a tendency to nudge rates higher. This is more the case if the predisposition is toward higher rates. The Fed is specifically instilling such a disposition with its "measured" rate hike policy.

Strategically, we hope to gain all of our collected option premium plus profits on the short futures down to 111'00. If we have a bust of support, the position can be adjusted. However, I am inclined to let the short futures cover the short 111'00 call and leave it at that. My sense is that the market won't decline much below 110'16 through April.

Subscribers noticed that I jumped out of the short 5 year and moved into the 30 year. Again, my logic follows the 10-year notes. In addition, any cap on our short March notes will be offset by the outright bond position...assuming the 30-year tracks in tandem. My sense is that risk perception is turning more conservative. This is to say that risk sensitivity is moving up. In turn, long-term rates should begin reflecting a more conservative investor attitude.

February 18, 2004

Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey
201-784-1235

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