January 5, 2006

Name: Thomas Hartmann and Erik Gebhard
Company: Altavest Worldwide Trading, Inc.
Years Trading: 15
Favorite Movie: Master & Commander

Best Buys for Early 2006

Read more about the author.

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Best Buys for Early 2006

It's less than a week into the New Year and you want all the answers!  Well, how about two for now, and those looking for more information can always check in with us over the upcoming weeks.  Those looking for ideas in the near term ought to consider gold, as well as coffee for near term robust-a action.


Going into the 2005 Christmas Holiday, the major news outlets seemed to give small bullish speculators a golden gift by relentlessly touting the yellow metal: Gold is the hottest item on the shelf - get it while you can! Stories were pumped out for a few days straight about this "sudden" development and in a frenzy, prices rocketed up to $545 an ounce. Of course, many seasoned traders know that often times an overwhelming focus from the media on any particular volatile market is a signal that the move may be over. Therefore, they rolled their eyes, exited bullish positions and banked some profits. A week or so later, prices lost over $40, and the intern journalist who thought gold would make another great headline news story that week is back working at Starbucks. Speaking of coffee, we'll return to that later.

While a few small greedy specs most likely got burned in that blow-off, the real gold bugs were licking their chops over this correction as the forecast for 2006 is a hot item. There are three main supporting factors which emerged in 2005 that will continue to provide underlying support throughout this new year. Look for physical demand and inflation worries to drive prices higher.

The first factor is physical demand derived from jewelry and industrial production. With growing economies in Asia, China and India in particular, the need for more jewelry production is rapidly increasing with the accumulation of wealth that is being brought about by a move towards capitalism. An 18% increase in jewelry demand was reported in China last year!
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Back in September '05 the buying power of the physical side, above $460, was seen as prices materially broke higher on upcoming demand for the New Year and Holiday season jewelry production. A strong global economy will indeed offer the necessary demand to support precious metal's prices.

Another factor emerged late in '05. This news story was buried for a day as the market fixated on the November FOMC meeting and the latest interest rate hike. Lost on that day were quotes from sources within the Russian, South African, and Indian central banks that interest was being taken to shore up their paltry gold reserves. These central bank monetary reserves hover around 5% gold. This is not an impact statement until one realizes that the United States and most of Western Europe hold 40% to 60% of their reserves in gold! Russia now wants to double their reserves, up to 10%! This gold producing nation would have to not sell any of its gold over the next 3 to 4 years to achieve the goal, but that is an unreasonable expectation. These mid-level central banks must increase their gold holdings, and will in the coming years, to better protect against devaluation in currency reserves.

The third major support for gold is "flight to quality". The gold-dollar relationship has been severed fairly thoroughly, with gold now trading off its own fundamentals and technical outlooks. With good reason, too! There is warranted concern about the long-term economic outlook for the United States and Europe. Western Europe must face problems associated with high unemployment (105% + in a few countries), an anemic birthrate, and universal benefits. The United States has solved its birthrate problem by embracing immigration, but has yet to master burgeoning deficit spending. Debt problems do not just plague the federal and state governments, as individual citizens carry high loads of credit debt, often financed from pulling equity out of home mortgages. Using a house as an ATM can only last so long, and eventually the US must produce goods and services of value.
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Wrapping this all up is fairly straightforward. If one doesn't trust the European state of affairs, and the long term US economic outlook is a nagging worry, but developing economies are robust, where does one put their money? Try the trusted storehouse of value used over the centuries, gold.

Technical: Take note of the gold chart below and notice that since mid 2005, the trend is clearly higher. However, prices rarely move straight up or down, and notice the large selloff that occurred immediately following the establishment of the high near $545.00. Gold bulls should always be light on their feet and ready to buy on such pullbacks, provided of course they have the financial wherewithal.

March Coffee

This explosive market looks to make a move north in coming weeks. Coffee bounced off of strong support in the 95-cent range and recently reached six week highs. Vietnam, which is a large producer of Robusta Coffee beans, was hit with abnormal amounts of rainfall in their normally dry season. This is taking a toll on their 2005-2006 harvest with much lower bean production, with rot perhaps spreading. Farmers are reporting premature flowering of trees, thus reducing the expectations for the 2006-2007 season.

This is on top of negative expectations to come out of Mexico and Central America after this past year's hurricanes and mudslides in the region. That is a lot of news to absorb, but fund managers have yet to concede defeat until recently. The long side of the market is not fully embraced but technical numbers are encouraging and the upside in the near term could be robust. Physical coffee is hard to come by presently and only a spike in prices can get supplies moving.
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Technical: Looking over the Continuation chart for Coffee there is large resistance in the 108 - 109 range. If Coffee can close above this mark on three consecutive closes, prices could easily take off upwards to 118 and even towards higher objectives.

Last Spring: With scares of a poor Brazilian crop, Coffee reached upwards of 140 cents per pound.

Remember that futures and options can be used for bullish or bearish positions; feel free to contact me to discuss trading strategies. Each contract/option = 100 ounces, a $1 move in a futures contract = $100.

Risk Disclosure:
The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose the full balance of your account. It is also possible to lose more than your initial deposit when trading futures and/or granting/writing options. As a result, selling/writing "naked" options exposes the seller/writer to the possibility of margin calls and virtually unlimited risk. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results.

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About Today's Author

Erik L. Gebhard
ALTAVEST Worldwide Trading, Inc.

Since 1991 Erik has been serving clients in the futures industry. He has helped develop paper trading programs, spoken at option trading seminars, and was an editor of trading newsletters and hotlines. Erik also created his own brokerage, ALTAVEST, where he currently co-authors the TradeScope™ newsletter, writes a Gold & Silver Review, and offers his personal brokerage services to select traders. His market analysis has often been quoted at sites such as CBS MarketWatch.com, Bloomberg.com and other futures related publications.

His tip for trading longevity is to "know where you want out before you get in." He also stresses the importance of using a methodical trading plan that incorporates sensible money management. He maintains a broader market perspective with the help of fundamentals, while using technical analysis to "fine-tune" entry and exit points. One of his favorite tools is Candlestick Analysis because it conveys price behavior quickly and effectively.

Thomas Hartmann

Thomas Hartmann is an analyst and broker at ALTAVEST Worldwide Trading, Inc.  Thomas's gold and metals commentary, featured on various online trading magazines, has been on a short hiatus while he has been developing the firm's new web site, but he'll soon return with more of his insights.  One piece of advice he offers to clients is to stay involved in the metals markets regardless of which side you favor.  The news that drives these markets is widely available to even the smallest trader and with mini contracts available, good liquidity, flexible execution and the availability of options, varying trading strategies can be developed to fit the profile of just about any trader.

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