Reloading Gold and Silver

- Henry Ford, quoted in the Memphis Commercial Appeal

PLAY: Buy the SLW September 5 Calls (SLW IA) at market, good for the day. Place a protective stop limit at $0.55 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the AUY January 7.5 Calls (WNZ AU) at market, good for the day. Place a protective stop limit at $1.35 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

When I discovered the quote from Henry Ford above, I couldn’t help but chuckle. After all, we find ourselves at a period in history where our governmental leaders are throwing countless billions of our tax dollars at “saving” companies that have been deemed “too big to fail.”

Insurance giant AIG is one such company. Citigroup and General Motors are two others. As all of this bailout money is being ineffectively spent to help these dead-beat companies, the markets are hitting levels that we haven’t seen in decades. But all the while, the most appropriate solution has already been identified by the man responsible for inventing the Model-T automobile. He said, “Failure is only the opportunity to begin again more intelligently.” As I watch the unprecedented economic events unfold right before our eyes, I couldn’t have proposed a more eloquent (and cheap!) solution. Now, if only our global leaders would listen.

Having said that, it’s time to get into this week’s newest picks. As I’ve outlined earlier this year, one of the most powerful investment strategies of 2009 will be playing the movements of precious metals. After all, precious metals (like gold and silver) act as the one and only protective position in times of economic turmoil. At the same time, the Federal Reserve continues to print tremendous amounts of money. Gold and silver are two of the most powerful ways to defend against the inevitable inflation that’ll come as a result of this excessive money-printing.

REMEMBER: There has never been a single recession/depression in history that has not been followed by inflation. This makes a very strong case for gold and silver here in 2009.

To get positioned to profit off this up-move, we entered two gold-based LEAPS positions. First was the Barrick Gold January 2010 40 Calls (WRX AH). Second was the IAM Gold September 5 Calls (IAG IA). As gold prices moved up to $1,000 per ounce, I felt that it was the ideal time to lock in our profits. Therefore, we sold both plays for gains of 105.71% and 60.78%. At the time of the sale, the plan was to lock in our profits, and then let gold and silver prices dip back down. And once they did, we would then re-load our LEAPS ledger my adding calls on precious metals companies for much more attractive valuations. Now, as you can see from the gold and silver charts below, this tactical strategy has played out exactly as we expected. As you’ll see below, both gold and silver prices have retreated off the previous highs, now offering us a prime opportunity to jump back in. See for yourself below:

For today, the plan is simple: We will get positioned in two of the most powerful gold and silver plays that your money can buy. And then, as precious metal prices find support and recover, we’ll be in position to lock in tremendous returns. So on that note, let’s get started!

Today’s first play comes in the form of Silver Wheaton Corp. (SLW – NYSE), which is a pure play on silver mining. In fact, they’re one of the only pure silver plays your investment dollars can buy. They produce silver from mines in Mexico, Sweden, Peru, and Greece, and when Wall Street realizes that silver has outperformed gold this year, you could see a rush of investment dollars into SLW. Gold is up 6% in 2009 while silver is up 15%. This is a sizeable difference, and one that will not go unnoticed for long. Not only that, but silver is historically cheap. Since 1968, the average price of one ounce of gold was 52 times the price of one ounce of silver. But right now, this gold/silver ratio stands at 74-to-1. In other words, silver could increase 35% to 45% above current prices and still be reasonably priced on a historical level. This all bodes well for a company like SLW, so let’s get positioned now!

PLAY: Buy the SLW September 5 Calls (SLW IA) at market, good for the day. Place a protective stop limit at $0.55 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Today’s second play comes in the form of Yamana Gold (AUY – NYSE).AUY is a gold, copper, and silver producer with properties located in Brazil, Argentina, Chile, Mexico, and Central America. This past Wednesday, Yamana Gold announced blowout earnings. They generated quarterly earnings of $179.4 million ($0.25 cents per share) compared with $47.1 million, ($0.08 cents per share) during the same period last year. Since analysts at Thomson Reuters were expecting earnings of only $0.04 per share, this was a monster earnings report.

According to AUY, they produced 254,774 ounces of gold at an average cost of $383 per ounce, which they sold at an average realized price of $789. This is quite a powerful return on investment. Plus, if gold prices begin another move towards $1,000 (and above), this ratio will only get better. In fact, Yamana’s chairman and CEO Peter Marrone said, “With gold reserves and gold resources at record levels, our goal of increasing total production by approximately 35% to 1.35 million gold equivalent ounces in 2009 is well supported."

And it gets even better. In addition to a blockbuster earnings report, Yamana reported on Tuesday that they discovered 1.5 million more ounces of proven gold reserves. This only increases the outlook for AUY’s future. Add it all up, and it looks like a perfect storm is brewing. Therefore, let’s get positioned to ride it using AUY calls.

PLAY: Buy the AUY January 7.5 Calls (WNZ AU) at market, good for the day. Place a protective stop limit at $1.35 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

SIDENOTE: In times of market chaos, the old adage tells you to identify bullish sectors by asking yourself this one simple question: “If you drop (fill in the blank) on your foot, will it hurt?” Let’s give it a try. If you drop U.S. dollars on your foot, will it hurt? No. Conclusion: US dollars are bearish. If you drop your iPod or your Blackberry on your foot, will it hurt? No. Conclusion: Technology is bearish. Now, if you drop gold bullion on our foot, will it hurt? You bet! Conclusion: Gold is bullish. Same with silver.

NOW I ADMIT: This might seem silly. But if you review the current charts on both gold and silver (shown above), you’ll see that both are offering you a prime example to protect yourself in a very, very dangerous market. Remember, gold is currently up 6% in 2009 and silver us currently up 15% in 2009. And considering that both metals have recently peaked in price — and subsequently pulled back — we’re getting an opportunity to buy into gold and silver for, what looks like, the lowest prices we’ll see for the remainder of 2009. As savvy investors, we do not want to miss this. So be sure to get positioned in SLW and AUY calls now!

UPDATES

GDX September 35 Calls (GBJ II): Perhaps we were a week too early in adding these calls to our LEAPS ledger, but if gold and silver prices rebound as I expect, we’ll be in fine shape. Hold.

RTN August 40 Puts (RTN TH): Late in the day on Friday, prices moved up to $7.60, good for a 50% gainer. Therefore, be sure to lock in profits on half of your position, and then hold the remaining half for more upside. Congrats on a very quick 50% gain! Sell half, hold the remainder.

M&T Bank July 30 Puts (MTB SU): I told you last week that it was only a matter of time before MTB hit a new 52-week low. Well, this week, these lows were indeed hit, which has handed you a nice 25% return. Be sure to take half of your profits at the 50% level. Hold.

NYSE Euronext January 2010 15 Calls (YVX AC): Despite a weak market, I remain convinced that we’re getting NYX at fire-sales prices. Hold.

FCX August 35 Calls (FCX HG): We locked in a 49% profit by selling half of this position on Wednesday, and since then these calls have moved up to gain 74.15%. Let’s go ahead and lock in the remainder of our profits at the 100% level. Sell the remainder at 100%.

United States Oil Fund January 2010 30 Calls (KWW AD): Influential oilman T. Boone Pickens was on CNBC this week predicting that oil prices are now on their way to the $70.00 level. If his forecast comes true, we’ll be in great shape with our USO calls. Hold.

GERN January 2010 7.5 Calls (WNM AU): Here’s a rock-solid example of why I want to maintain our upside exposure to stem cell plays like GERN. The story is about Dakota Clarke, a two-year-old girl who suffers from Septo-Optic Dysplasia. In other words, she was born blind. She recently underwent a pioneering sight-saving treatment in China, which involved stem cells that were fed into her forehead. The stem cells used at the Chinese clinic came from umbilical cords donated by mothers in local hospitals after giving birth. Only 15 other people in the entire world have tried this new treatment. In fact, Dakota was the first British child to undergo the procedure. The procedure was successfully completed, and she’s now being declared a “miracle” by her parents. You see, Dakota has recognized her mom and dad for the first time. In fact, the treatment has allowed her to gaze at people, objects, colors, and lights around her. And according to witnesses, the child absolutely beams with joy as she explores her world for the first time in her life. This heartwarming story clearly shows you the remarkable powers of stem cell technology. When I read stories like this, I can’t help but think that the power of stem cells is just scratching the surface. Therefore, our GERN calls remain a hold.

VIX May 60 Calls (VIX EN): Remain protected! The major market averages are breaking to new 52-week lows, yet the VIX remains 30 points under the 80 levels that it hit back in November. Something does not add up. In my view, this indicates that we could have a market washout coming soon. And if so, the VIX could realistically blast all the way up to 100. I’m not kidding. Heck, by this time next week, the Dow could be at the 5,500 level. Therefore, make sure you own these two protective positions. Hold.

DNA March 80 Calls (DWN CP): Blastoff! On Friday afternoon, we got a wonderful surprise. Swiss drug developer Roche boosted their hostile takeover offer for Genentech by 7.5% to $93.00 per share, and in response shares of DNA soared. This allowed us to book a strong 59% profit on half of our position. We’re holding the remainder for more upside. Hold remaining half.

TEVA January 2010 45 Calls (WTX AI): The news from DNA should also have a positive impact on TEVA. Therefore, maintain these calls as well. Hold.

Verizon April 30 Puts (VZ PF): We were able to lock in the remainder of our profits on this position on Friday afternoon, locking in a 65% gain. Congrats on another nice winner. This position is now closed. Sold.

Yellow Roadway January 2011 2.5 Calls (VYX AZ), AK Steel January 2010 15 Calls (YDF AC), & Southern Peru Copper January 2010 25 Calls (YPV AE): Our longer-term recovery plays have continued to move lower. But once again, that’s why we bought plenty of time. Copper is at a three-month high, and this bodes well for PCU and AKS. As I mentioned before, it might behoove us to “roll” our AKS and PCU positions from 2010 to 2011, just to give us one additional year of time to recover. If the time comes to make this move, you’ll be the first to know. Until then, maintain these plays. Hold.

Sincerely,