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Two Safe Ways to Profit From the "Alibaba Shockwave Effect"

In the mid-1990s, I was fortunate to meet and start working with an Upstate New York money manager named Anthony M. Gallea.

The relationship began when I attended and wrote stories about some of the investment seminars he periodically held for prospective and existing clients. He then became a “source” for some of the investment stories I periodically wrote for Gannett Newspapers. And we ultimately collaborated on a pretty successful book about “Contrarian Investing” that was published by Prentice Hall.

Along the way, Tony shared some pretty important snippets of investing wisdom…

  • Gold Prices

  • As Gold Prices Climb, This Options Trading Strategy Tells You When to Buy While most experts agree the long-term outlook for gold prices is still bullish, the yellow metal's pattern this summer can only be described as one of fits and starts.

    In all, gold has made 11 short-term bottoms since May 29, the lowest being a close at $1,552.40 an ounce on June 28. Meanwhile, subsequent rally attempts have all quickly run into resistance, stalling out at near $1,620.

    This start-and-stop action makes it extremely difficult for investors to avoid being "whipsawed."

    Fortunately, there's a way around this dilemma: Just use an options trading strategy that lets the market itself tell you exactly when to buy gold.

    And, here's the best part: This clever options trading strategy will cost you only a few dollars.

    It can be used on gold futures - e.g., the standard 100-ounce CME Group contract, on any of the gold mining stocks or on the much more affordable gold-backed exchange-traded funds (ETFs) on which options trade.

    Taking the Guesswork Out of Gold Prices

    For ease of explanation, I'll base our example on the most popular and actively traded of the gold ETFs - the SPDR Gold Trust (NYSEArca: GLD).

    Recently quoted at $155.75, the price of a single GLD share usually tracks the price of one-tenth of an ounce of gold (discounted by 2.5%-3.0% for fund expenses and storage costs for the metal that backs the shares).

    Here's how you would initiate the strategy, based on actual prices available last Friday:

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  • Gold Prices Waiting to Rally on Central Bank Decisions Last week it was earnings reports taking center stage, this week it's policy statements from the U.S. Federal Reserve and European Central Bank (ECB).

    What comes out of the central banks could have a huge impact on the gold market. Gold prices have been on the rise - 2.5% last week - and could keep going depending on what the central banks deliver.

    Gold prices on Monday saw their fourth consecutive day of increases. The August contract rose 0.1% to $1.70 with a $1,619.70 settlement price, thanks to market participants buying on optimism from this week's Fed action.

    A two-day meeting begins today (Tuesday) for the Federal Open Market Committee (FOMC). After its conclusion Wednesday, market watchers will be waiting with bated breath on whether a third round of quantitative easing (or QE3 as it is fondly called) will take place.

    If that isn't enough, there's Thursday's meeting over in Europe with the ECB. They're also set to make a monetary policy decision.

    Let's take a look at these two potential actions that could drive up the price of gold.

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  • Keep a Close Eye on Gold Prices Next Week The U.S. Federal Reserve is about to give a huge boost to gold prices, and the first push could come as soon as next week.

    The parade of dismal economic reports both here and abroad has stoked hopes that more stimulus, in the form of a third round of quantitative easing, is imminent. A clear signal of when we can expect QE3 could come at next week's two-day Federal Open Market Committee (FOMC) meeting that starts July 31.

    An increasing number of Federal Reserve officials are convinced the central bank must expand its stimulus operation immediately amid the recent spate of glum data signaling economic growth has hit a roadblock. Several members will push for urgent action, although some may move to delay a decision until September.

    Fed Chairman Ben Bernanke told Congress last week that a fresh round of quantitative easing is an option the FOMC is mulling to try and lower the elevated unemployment level.

    "We are committed to ensuring, or at least doing all we can to ensure, that we continue to make progress on unemployment," Bernanke said just last week.

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  • With Gold Prices Flat, It's Time for Junior Miners to Shine After a heady couple of years, the Midas metal has lost momentum. Gold prices have slipped about 2% in July to fall just below where they started in 2012.

    And gold mining stocks have felt the brunt of it more than the metal itself.

    For the past few years, the miners have been chasing the metal. The general expectation was that the mining stocks would eventually catch up to gold prices.

    But now it looks like the metal is retreating to meet the miners.

    The Market Vectors Junior Gold Miners (NYSE: GDXJ), an exchange-traded fund (ETF) that represents the junior miners, is off more than 25% since its inception in late 2009. The big miners represented by Market Vectors Gold Miners (NYSE: GDX) are essentially flat over the same period.

    Yet gold prices, as measured by the SPDR Gold Trust (NYSE: GLD) are up almost 40% in the same general timeframe.

    So where does that leave gold investors?

    Well, it's probably not an ideal time to buy gold if it's pausing here (which it seems to be doing) after a multi-year rally.

    And the big miners have their hands full as gold prices have stalled and gold demand has fallen. They may be fully valued, at least for the time being, since they won't be undertaking new projects or acquisitions until things get better or worse.

    Beat Gold Prices with a Junior Miner

    That leaves the junior miners. They're undervalued enough that they still have some headroom, even given today's tepid metals market. And if things start to improve, they become buyout targets for the big miners.

  • How to Buy Gold in Today's Troubled World Gold turned in a fairly tarnished performance during the second quarter, falling $80 an ounce, or 4.76%, during the April-June period.

    Even still, most precious metals analysts see strong potential for gold prices in the second half of 2012 given the continued sluggishness in the global economy and increasing uncertainty about the Eurozone debt crisis.

    Some are suggesting that gold prices could top their previous 2012 high of $1,795.10 an ounce set back in February.

    Given that, the big question for investors is how to buy gold in a renewed bull market for the shiny metal.

    The answer largely depends on your expectations.

    If you expect renewed economic disruptions in Europe and elsewhere, growing tensions in Syria, Iraq, Egypt and the rest of the Middle East, and increasing political discord in the U.S. before and after the election, you'll likely want to take the traditional approach - holding the physical metal itself.

    Purists feel this is the only true hedge against global turmoil and declining values in the dollar and other fiat currencies.

    How to Buy Physical Gold

    For smaller investors, this typically means buying gold bullion bars, rounds (unadorned coin-shaped pieces) or minted gold bullion coins.

    Bullion bars - produced primarily by private mints like Engelhard, Johnson Matthey PLC (LON: JMAT) and Credit Suisse Group AC (NYSE ADR: CS) - come in an assortment of sizes to suit the needs and means of every investor.

    The smallest bars weigh just one gram, priced this week at about $52.75, while the largest is 400 ounces and was going this week for around $645,000.

    Gold rounds are produced by the same private refiners, as well as some government mints, and are also available in a variety of sizes, typically ranging from one-tenth of an ounce to five ounces. Prices range from as little as $15 per round over the spot price of gold at the time of the order for smaller pieces to $40 over the spot for larger specialty pieces.

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  • This Gold Prices Cycle Shows We're Headed for a Rise The recent slide in gold prices has left investors puzzled over why the metal is not acting in the way it was intended: a safe haven from economic uncertainty.

    But as Martin Grubb, managing director of investment for the World Gold Council, explained in a recent commentary for MarketWatch, it is not all that unusual for gold to experience a delayed reaction to macroeconomic events.

    That's because gold is one of the very few assets that retains its value during tumultuous economic times. It is often the go-to holding investors sell when they need to raise cash, want liquidity, or are faced with margin calls. So events can trigger a gold sell-off and knock down prices before sending them soaring.

    Grubb referenced Black Monday 1987 as a perfect example. The infamous day rocked markets the world over. Many feared it was a "financial Armageddon" as billions of dollars were erased from stock prices during the month of October.

    Gold, instead of rising as market participants looked for safe haven assets, dropped as it was sold to raise cash to bolster accounts. It hit as low as $390 in the months that followed before rising to $484 by the end of 1988.

    An even more extreme example of gold's liquidity role was the 1997-1998 Asian currency crisis. The Korean won was unacceptable in currency markets, so the Korean government stepped in and bought gold from locals in exchange for interest-bearing won-denominated bonds.

    The Korean government sold the 250 tonnes of gold it received in the international market and was able to service its debt with the sales.

    A more recent example of gold's initial sell off in a financial crisis is the Lehman Brothers bankruptcy in September 2008. Despite the bank's failure marking the credit crunch kick off, gold initially fell for a couple months as investors sold it for cash. Then it started a bull run that ran the price up 156% in three years.

    Grubb wrote that we are currently in the infancy stage of a new crisis and gold's legendary behavioral pattern is repeating itself.

    The precious metal is being liquidated to meet margin calls. In addition, it is believed the yellow metal is being lent into markets to provide ailing European banks with much needed liquidity.

    "As a result, gold is not yet reacting to the worsening euro zone news and its current behavior is much like its behavior prior to and shortly after the Lehman bankruptcy," Grubb wrote.

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  • Higher Gold Prices Triggered by Europe In early trading Friday, it was like old times again - gold prices soared and it was well overdue.

    The yellow metal glistened in early trading, with gold for August delivery rising 3%, propelled above the key $1,600 level. Fueling the strong gains in gold and other markets were encouraging words out of the European Union summit.

    As the pivotal two-day meeting in Brussels wound down, global markets and commodities rallied after EU leaders struck a "breakthrough" deal to ease the recapitalization of banks. The plan was aimed at pulling the Eurozone back from the edge of its debt crisis.

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  • Gold Prices: Begging for QE3 The Fed's Operation Twist announcement Wednesday slammed gold prices, and the yellow metal fell 2.5% Thursday.

    Gold for August delivery ended last week down 3.8% to about $1,570 an ounce, well below its 2011 high of $1,920.30.

    Before the two-day FOMC meeting, gold was up 4% year-to-date. Gold rose at the beginning of the week on hopes that the Fed would announce accommodative moves.

    In the last round of easy-money moves back in January, gold rallied as high as 15% as investors flocked to the asset for protection. Since then, gold has dropped numerous times from a lack of additional news of more easing.

    Gold was once again disappointed last week when the Fed said it would keep twisting, and the lack of a more aggressive maneuver failed to give a needed gold rally.

    "To get gold really moving, you need a definite QE3," Sterling Smith, commodity analyst with Citi Institutional Client Group, told Kitco News. "Operation Twist is not nearly the food for a gold bull that outright QE is."

    Gold Prices and Operation Twist

    On Wednesday morning, the Fed announced the extension of its long-term government bond holdings by $267 billion to decrease borrowing costs while selling an equal figure of short-term securities to keep its $2.9 trillion balance sheet.

    While scheduled to end this month, the Fed extended the Operation Twist program until the end of the year.

    Operation Twist is derived from a Federal Reserve program that "twists" the yield curve or sells short-term securities from its holdings and buys longer-term ones in an effort to drive down longer-term yields.

    Market watchers had been mixed about this happening.

    Barclay's Capital saw Operation Twist as "the most likely outcome," saying it would provide additional time for the Fed to sift through and mull soft data that is "payback" from the additional warm winter hiring or a potentially lengthier prolonged slowdown, reported Kitco.

    But since Operation Twist was considered the least the Fed could do, markets had priced it in already.

    Jeffrey Wright, managing director and research analyst with Global Hunter Securities, said to Kitco he expected limited gains for gold on the heels of the "Twist," possibly to the $1,650 range, as the market has already been adding in the possibility for Fed action.

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  • How Shorts on Gold ETFs are Nearing a Big Squeeze There has been an increasing number of investors taking short positions on gold exchange-traded funds (ETFs) - but they better watch out for what's ahead this summer.

    In fact, each day that passes brings us closer to what could be the day of reckoning for those holding massive short positions on the ETFs for gold, silver, copper and related investments.

    You see, the Federal Reserve Bank of Kansas City in late August will host an economic policy symposium in Jackson Hole, WY. Speaking at the conference, as he did in August of 2010 when he introduced the second round of quantitative easing, will be Federal Reserve Chairman Ben Bernanke.

    There is much to believe that QE3 - if not declared sooner - could be announced at Jackson Hole. Should this happen, the prices of gold, silver and copper will likely soar like back in 2010.

    That means anyone holding shorts on gold ETFs or similar investments could find themselves scrambling to cover their positions.

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  • Why Gold Prices are Ready to Rally Gold prices hit a four-week high last week as the market waited for the highly-anticipated congressional testimony by Federal Reserve Chairman Ben Bernanke.

    But gold bulls were pushed aside Thursday after Bernanke, in a speech to Congress, failed to deliver a definitive answer on monetary easing.

    Deutsche Bank analysts wrote in a Friday research note via Dow Jones, "The past week has demonstrated how expectations [toward] quantitative easing can have a powerful effect on the gold price."

    Now investors need to wait for the June 19-20 FOMC meeting for more clarity on what the Fed could do this year and how metals prices will be affected.

    Gold prices have recovered since then, and on Tuesday the yellow metal pushed above the $1,600 an ounce mark. The weekend's news about the Spanish bank bailout and lingering concerns over the Eurozone debt crisis has increased alarm about the global economy, making gold more attractive.

    But news from Europe and Fed policies aren't the only factors that can move gold prices. Here's what else is affecting the metals market now.

    The Biggest Factors Moving Gold Prices

    #1: Central Bankers are Buying Gold

    For the first time since 1965, central bankers are purchasing gold.

    According to World Gold Council, the central banks have increased their gold collections by 400 metric tons or almost 2,205 pounds in the last 12 months through March 31.

    This is a rise from the previous year's 156 tons.

    Look for this to continue from the central bank as the council noted it "is now confident that central banks will continue to buy gold and has added official-sector purchases as a new element of gold demand," according to Austin Kiddle in a Sharps Pixley report.

    Jeff Christian, founder of New York-based commodities consulting firm CPM Group, told Barron's that central banks "will probably be continuous buyers of small volumes of gold for the foreseeable future," accounting for roughly 10% of the gold supply.

    Christian noted that central bankers will avoid buying any quantity that dramatically affects the price of gold. Yet steady buying of 10% of annual supply is certain to help buoy gold prices.

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  • Gold Prices: Central Banks See Shine in Yellow Metal When Federal Reserve Chairman Ben Bernanke failed to hint at more monetary stimulus last week, gold prices took a small hit.

    But the picture for gold investors just brightened again thanks to increased activity from central banks.

    Central banks are buying the yellow metal in copious amounts, marking the first time since 1965 that bankers have been such steady buyers.

    Central banks amplified their gold stores by 400 metric tons, the equivalent of almost 2,205 pounds, in the 12 months through March 31. That was an increase from 156 tons in the same period a year ago, according to data from the World Gold Council.

    Barron's reported Saturday that the World Gold Council "is now confident that central banks will continue to buy gold and has added official sector purchases as a new element of gold demand," according to a report from London-based bullion dealer Sharps Pixley.

    The fresh facts indicate that central bank purchasing will continue for the foreseeable future.

    That is quite a turnaround from the heavy selling the banks made from 1966 through 2007. During that time central bankers engaged in substantial selling, with only short periods of meager buying.

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  • Gold News: Why the Yellow Metal is Glistening Comex gold futures surged Friday and soared to a bright three-week high following a very dismal U.S. jobs report.

    The rally in gold came after the Labor Department reported employers added just 69,000 jobs in May, well below the anticipated 150,000. The data also pushed the unemployment level up a tick to 8.2% from 8.1%, stoking worries that the U.S. economy is still ailing and a recovery is far from certain.

    The lackluster jobs report ignited hopes that a fresh round of quantitative easing may be in the near future. Gold prices climbed on the prospect.

    Market participants returned to gold pushing the front month contract up some $59, nearly 3%, in early afternoon trading to $1,619.10 a troy ounce.

    Silver rose in concert, gaining 96 cents to $28.67.

    Trading was heavy and volatile in precious metals Friday, as traders moved quickly to cover short positions.

    To date in 2012, gold has been experiencing its worst showing since the 2008 financial crisis. But the catalysts may be aligning to turn the trend upward.

    "It's very likely that the economic data today and what's come out of Europe has convinced the market that there will be further government monetary stimulus," Robert Lutts, chief investment officer of Cabot Money Management, told Reuters. "Larger institutions will commit money to gold in ways they never had before."

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  • Here’s the Deal with Gold Prices Gold prices have slipped, and investors keep wondering how low they’ll go. Money Morning Chief Investment Strategist Keith Fitz-Gerald joined Fox Business’ “Varney & Co.” to discuss the factors keeping gold down. Fitz-Gerald said these two reasons are the main drivers behind lower gold prices. In this video he explains if those factors are long-term or not. He also discusses with host Stuart Varney how Europe may handle its debt crisis, how the strategies will further affect gold – and how the current market and economic statistics could influence election 2012. Read More...
  • Gold Mining Stocks: Now is the Time to Buy There are lots of reasons you should own some gold. Despite taking a recent breather, gold prices are still up by 139% in the last five years.

    Even so, shares of gold mining stocks have suffered lately, hurt mainly by higher energy and exploration costs.

    In fact, the stocks of the large gold miners have become nearly as undervalued as they were during the 2008 financial crisis.

    The last time shares of these big gold producers were this cheap, they rallied by 283%.

    At these levels, that means it's time to take a closer look at shares of big gold miners - while they are still a bargain.

    Here's what you need to know...

    The Gold Bull Market is Not Over

    A number of factors point to higher prices for gold:

    • Real interest rates remain in negative territory. Sitting in cash right now is a losing proposition.
    • The austerity movement in Europe is being replaced with more fiscal easing. The European Central Bank may have to print trillions of euros of debt to keep the Eurozone intact.
    • The odds of more fiscal stimulus in China and the U.S. have increased, as two of the world's largest economies struggle to gain traction.
    • Despite healthy demand and rising prices, global production of the metal rose just 0.7% annually from 1999 through 2011.
    Combined with aggressive gold-buying binges by China and other foreign governments moving away from the U.S. dollar, the stage is set for the price of gold to rally.

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  • Gold Prices: Making Sense of the "Death Cross" Gold prices have tumbled 16% since last summer and, more recently, suffered a "death cross" leading many investors to question whether or not gold's bubble has popped.

    If you're not familiar with the term, a death cross is what it's called when the 50-day moving average of the price of a traded instrument - in this case gold - crosses the 200-day moving average from above.

    I disagree.

    I think that the 16% drop since last September is simply based on a corresponding decrease in speculative interest at a time when the dollar has become the best looking horse in the glue factory.

    Traders are simply moving currencies as the euro comes apart.

    This isn't hard to understand when you consider that the dollar and gold have an inverse relationship. If one rises, the other traditionally falls.

    I don't expect that to last much longer.

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