With the election eleven days away and many markets trying to catch their breath, investors are indecisive about positioning themselves for 2021. I wanted to lay out the possible election stimulus outcomes, common mistakes investors make, and potential strategies that one could consider implementing right away. Remember the old saying, “plan your trades and trade your plan,” so let’s get right into it.
The day after the election
Everyone knows the first order of business will be to enact fiscal stimulus measures, and these are the three likely scenarios.
1. Biden win + Democratic Congress called the “Blue Wave,” resulting in $2.0 – 2.5 trillion in stimulus, including additional funds for the COVID-19 health response, which should be passed right after the inauguration.
2. Biden win + divided Congress: $500bn – 1 trillion in stimulus passed after the inauguration but with some potential delay because of a continued gridlock.
3. Trump win + divided Congress: $1.5 – 2.0 trillion in stimulus passed in lame-duck because there is nothing to gain from the parties waiting.
The point of laying out these scenarios is to bring to your attention that the amount of stimulus and timing of stimulus could play a role in the trajectory of commodities, industrial metals, and precious metals. Therefore it is essential to have a plan and pre-position in the market rather than do what a typical consensus investor does, which is to “sell the low and chase the highs.”
Strategies and Ideas
Suppose you are going to stick to trading miners. With earnings do out in the next two weeks, my opinion is to look at companies with rising free cash flow, increasing dividends, pushing projects forward into a developmental phase with the prospects of strategic mergers and acquisitions on the table. Avoid companies falling short of consensus earnings per share; these will most likely underperform in 2020. My thoughts are if your mine cannot turn a profit with gold near all-time highs, explosive demand, record-low borrowing rates, low fuel costs, when can you?
Micro Gold futures
We maintain a bullish view on gold because of the underlying reason that the dollar will further debase, and governments globally will continue fiscal stimulus. The Fed has also indicated that they are not opposed to an overshoot in inflation.
This strategy builds a core exposure in gold to combat an inflationary environment in 2021. We suggested that our clients consider using FOUR Micro 10 oz December Gold contracts per $25,000 and buying TWO at 1910 and TWO at 1855, with a stop at 1790. Doing such would ideally risk $3,700. We would look to a gold first quarter target of 2275/oz, which would allow for a profit of $15,700.
Mini Silver futures
The second strategy is for clients who have patience in getting fills while looking to capitalize on unwanted sudden collapses in the market. Call it “manipulation” call it whatever you want; we look at these as the day after Thanksgiving “Black Friday sales.”
We suggested that our clients consider using 3 Mini 1000 oz December Silver contracts per $25,000 and buying ONE at 23.30 and ONE at 21.90 and ONE at 20.30 with a stop at 18.80. Doing such would ideally risk $9,110. We would look to a silver target of $40/oz, which would allow for a profit of $54,500.
This third strategy is for speculators who already have some exposure to gold and silver or are waiting to fill our mini silver futures strategy without worrying about chasing prices higher if it does “breakout” to the upside.
We believe that once Gold and Silver start to take off again, there will be a rush to enter back into the metal at an alarming rate. The breakout will cause a more accelerated move higher in silver and a potential for another blow-off top like witnessed in 2011.
Therefore, the strategy is to purchase the April 2021 Silver futures $29.50 call option while selling an April 2021 Silver $35.00 call against it. The plan will create a calculated risk Bull Call spread and costs $3,500 while your maximum gain would be $27,500 if silver futures close above $35/oz at expiration on March 25, 2021. We believe this strategy achieves a low-risk high reward profile.
We maintain the belief that copper demand will continue to improve throughout 2021. China has had steady demand in the second half of 2020, and consumption should continue to improve in the U.S. with increased infrastructure spending. As interest rates remain low and growth begins to accelerate, studies have shown that copper presents itself as another metal that shields against inflation and participates in economic development. We will be looking at option strategies going out into the second half of 2021 on the next good correction below $3/pound.
Gasoline and Oil
We expect that gasoline demand should increase as people opt to drive instead of flying or taking public transportation in the energy space. Therefore oil demand should continue to grow, reaching pre-covid demand levels into early 2022. We will be building a long options strategy on the next seasonal low.
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Originally Posted on October 23, 2020 – Blue Line Futures 2021 Key Calls and Trading Strategies
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