Adding Inflation Protection

Add ABX Calls

PLAY: Buy the ABX January 2010 40 Calls (WRX AH) at market, good for the day. Place a protective stop limit at $2.10 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

Dear Bottarelli Research Member,

Last week, we took advantage of a substantial sell-off in natural gas to get positioned for a coming bounce using the United States Natural Gas Fund January 40 Calls (UNG AN).

This week, we’ll make a similar play on the “over-sold” conditions in gold prices — with specific emphasis on shares of Barrick Gold Corporation (ABX – NYSE).

Barrick Gold is the largest pure gold mining company in the world, with substantial mining operations in North America, South America, Australia, and Africa. In addition to gold, they also have major mineral projects in copper, silver, zinc, nickel, platinum, and palladium.

All told, ABX has proven and probable mineral reserves of 124.6 million ounces of gold, 6.2 billion pounds of copper, and 1,033 million ounces of contained silver.

Thanks to a 6% decline in global mine supply, combined with 40% of gold’s demand coming from high growth areas such as India and China, the sell-off in gold appears to be a prime buying opportunity.

In fact, there are three upside triggers currently coming together at once — all of which make ABX attractive at current levels. I’ll break down all three upside triggers below.

Upside Trigger #1: First and foremost,the 3-year price chart of gold prices (shown below) shows you that the yellow metal has dipped underneath its 50-day moving average for the first time since October of 2006. This presents us with an “over-sold” buying opportunity leading into Q4 (which has historically been a bullish season for metal prices). The 25% gold price dip from $1,000 down to below $800 should set a bottom similar to the pricing pattern in Q4 of 2007. This could spark an upside recovery rally back above the $1,000 level by March of 2009.

Upside Trigger #2: If the major U.S. banking crisis continues to escalate, you could see a rush of investment dollars going back into gold as a “safe haven” investment. Not only that, but Europeans and Asians buy much more gold than the average American. Their currency strength, combined with the recent gold price dip, could spark a high level of overseas buying interest in gold. After all, it’s a well known fact that China (and the rest of Asia, for that matter) spends a much larger portion of their budget on jewelry — making a strong case for a gold price increase moving forward.

Upside Trigger #3: And most importantly, recent comments out of the Federal Reserve had a very strong inflationary tone. If the Fed begins raising short-term interest rates to fight inflation, you will witness a swift and sudden rebound in gold prices. In fact, many gold bugs are predicting that prices could hit $1,400 an ounce next year, good for a 75% increase from current levels. Since ABX is one of the lowest-cost gold producers in the world, a price increase of this magnitude would offer ABX shares a tremendous upside push.

Combine all three upside triggers, and you’re left with a very strong argument for buying into the latest decline in gold prices. In fact, one look at the ABX chart shows a severe price fall. Notice that a support level is now being established right at the 200-day moving average, and this looks to be a very firm bottom. This offers us a tremendous opportunity to add longer-dated calls to our LEAPS ledger. So on that note, let’s get positioned now!

PLAY: Buy the ABX January 2010 40 Calls (WRX AH) at market, good for the day.

TACTICAL NOTE: Notice that we’re buying the January 2010 calls, which should offer us plenty of time to see both gold and ABX fully recovery from their recent price declines. This is part of the new LEAPS strategy that I alluded to in last week’s alert. Armed with an extra 12 months of expiration time, we’ll be able to withstand the current market conditions and come out with a strong winner on this play.

UPDATES

United States Natural Gas Fund January 40 Calls (UNG AN): It was a volatile week for commodity prices, but shares of UNG have done a good job of maintaining their floor. Your calls traded as high as $5.80 this week, good for a 20.83% return. Maintain this position and sell half if your profits reach the 50% mark. Hold.

JA Solar Holdings January 15 Calls (QJP AC): What a great week of earnings in the solar sector! On Tuesday, JASO reported that their Q2 profit hit $46.4 million, up substantially from the $11 million they made in the same quarter one year ago. But due to changes in the fair value of their conversion option (and other changes related to its bond issues), JASO lost $0.01 on a per-share basis. But at the same time, revenue for the quarter hit $180 million, another sizable increase from the $67 million in revenue from the year-ago period. This allowed JASO to re-affirm their 2008 revenue forecast in the range of $1.05 billion to $1.17 billion. This is good news for JASO going forward, so the upside bias remains in tact. Hold.

Ultra Short Dow30 ProShares October 65 Calls (DXD JM) & CBOE Volatility Index October 25 Calls (VIX JE): As the market volatility continues, I continue to like the idea of holding downside protective positions like these two. Hold.

Valero Energy January 35 Calls (VLO AG): Oil prices continue to fall to new 2008 lows, and this paints a bullish picture for oil refiners like VLO. Maintain your calls for further upside. Hold.

Deckers Outdoor September 90 Puts (QUK UR): After taking half of our profits off the table, the remaining half of this position has drifted lower. I continue to maintain my bearish viewpoint on shares of DECK, and I could very well recommend a new round of puts in a forthcoming alert. But because this position contains a September expiration, we must implement an exit strategy now. Therefore, close out the remaining half of your DECK put position next week. Sell remaining half.

Salesforce.com CRM November 55 Puts (CRM WK): Another failure at the 50-day moving average continues to support our bearish bias. Look for further downside action next week. Hold.

Overseas Shipholding Group January 95 Calls (OSG AS): After a series of volatile trading sessions, OSG looks like it’s found support at the 200-day moving average. Therefore, I’d like to stick with this pick a little longer. Hold your calls in anticipation of a bounce back up above the 50-day moving average. Hold.

America Movil January 2009 70 Calls (AMX AN), Petroleo Brasileiro January 90 Calls (PMJ AR), & Entergy January 140 Calls (ODF AH): These three positions have experienced the biggest downside moves. While all three companies remain positioned in bullish sectors, we need to see the major market averages firm up before they can mount any type of recovery. There is no sense selling at these current levels, so maintain all three positions for a pending bounce. Hold.

Sincerely,