Betting on Big Bounce in Gold

Global stock markets rebounded last week, with the Dow Jones rising 0.74% and the S&P 500 recovering 1.13%. Even the long-suffering MCSI Emerging Markets Index ended the week 2.91% higher.

Big gainers in your Bull Market Alert portfolio included Bank of Ireland (IRE), jumping 5.25%; Sony (SNE), rising 3.97%; and Jazz Pharmaceuticals (JAZZ), up 2.38%.

This week’s Bull Market Alert recommendation, ProShares Ultra Gold (UGL), is a leveraged bet that tracks twice (200%) the daily performance of the price of gold.

Gold has gone quickly from “safe haven” to “contrarian bet” over the past six months.

Down 26.48% in 2013, gold fell below $1,200 an ounce last Thursday for the first time in three years, after posting its largest quarterly loss in at least 45 years. After Friday’s rally of 2.3%, gold is still 23% lower for Q2 — its biggest decline since at least 1968.

So why the collapse in gold prices? Investors have held gold for two reasons. First, they were worried about the inflationary impact of the Fed’s loose policy. Second, they thought the financial system was going to implode.

For now, the market has shown that neither of those is a concern.

As a result, many investment banks reduced their target prices for gold. Morgan Stanley, Deutsche Bank, UBS and HSBC have cut their average 2013 gold price forecasts to $1,409, $1,431, $1,440 and $1,396, respectively. Goldman Sachs reduced its 2013 year-end forecast for gold by almost 10% to $1,300 an ounce with a further decline to $1,050 by the end of 2014.

Note that with gold closing at just under $1,200 on Friday, all of these forecasts imply a rising gold price in the second half of 2013.

With gold as technically oversold as I’ve ever seen it, I believe that the yellow metal is due for a big bounce, independent of its “fundamentals” — however you may measure that.

With the 2x leverage of ProShares Ultra Gold (UGL), you’ll see double-digit percentage gains if gold bounces back to roughly $1,260 an ounce, still far below the lowest of its current target price levels.

So buy ProShares Ultra Gold (UGL) at market today and place your initial stop at a wide $32.00.

If you want to play the options, I recommend the October $50 calls (UGL131019C00050000).

Note that this recommendation is a particularly volatile bet, so you may want to take a smaller position than you normally do.

Portfolio Update

Bank of Ireland (IRE) bounced strongly last week, gaining 5.25%. As if on cue, IRE launched upwards after touching its 200-day moving average. Euro-zone finance ministers recently discussed allowing Ireland access to retroactive financing via the new European rescue fund called the European Stability Mechanism (ESM). The ESM gives European banks access to nearly $80 billion in funds allocated for recapitalization activities. IRE is a HOLD.

Melco Crown Entertainment Limited (MPEL) dipped 0.58% last week. MPEL staged a measured turnaround of its own last week after several analysts released positive commentary. In particular, JP Morgan issued a statement urging investors to buy the recent dip. All analysts believe that any negative news from China would have little impact on growth in Macau. MPEL is a HOLD.

Delphi Automotive (DLPH) added 2.01% over the past five trading days. Barclays reiterated its “Overweight” rating on DLPH last week and increased its price target to $61.00 — 20% higher than Friday’s closing price. DLPH remains a BUY.

Stratasys Ltd. (SSYS) added 1.94%. Big news emerged last week as Microsoft and Stratasys announced that support for 3D-printing will be included in the forthcoming new release of the Windows 8.1 operating system. With the Microsoft’s Windows operating system (OS) being the dominant OS on hundreds of millions of PCs worldwide, the bullish case for 3D-printing just took an exponential jump upwards. SSYS is a BUY.

Jazz Pharmaceuticals (JAZZ) rose 2.38% last week. JAZZ may be poised to move higher in the coming weeks as volume on JAZZ shares jumped from the average 950,000 daily shares to nearly six million last Friday. This action comes on the heels of a positive research report released by Wall Street Reports last week highlighting some of the amazing innovation in the pharmaceutical space and included positive commentary on JAZZ’s recent development efforts. JAZZ is a BUY.

Sony Corporation (SNE) followed up last week’s gains with a second winning week, adding another 3.97%. Gaming fans will get an up-close look at Sony’s new Playstation 4 (PS4) video game system at the end of August. The PS4, as well as Microsoft’s next generation gaming console, will be on display at the GameStop EXPO beginning Aug. 28 in Las Vegas, Nev. SNE is a BUY.

iShares Dow Jones US Home Construction (ITB) added 1.45% for its first week in your Bull Market Alert portfolio. Housing appears poised for a move higher as it has traded both above and below its 200-day moving average. Recent positive data also suggests that bullish sentiment is quickly returning to the housing sector. ITB is a BUY.

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