Now's a Great Time to Hedge Your Gold Bets 37 comments
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Funny things have been going on in markets for some time now. Stocks, corporate bonds, commodities, and currencies were decimated in 2008, with the volatility threatening to persist into the New Year. There’s talk of deflation, inflation, stagflation, defaults, bankruptcies, layoffs, unemployment, and the best word of the year: de-leveraging. Wait, is that even a word?
The only thing we know is that we don’t really know what’s happening or where it’ll take us. The more confused people become the more gold they buy. In fact, from peak to trough gold (GLD) has risen 52% over the last 52 weeks. With this kind of bull run, it makes sense to lodge a small bet in the other direction.
This rise has been sharp. Over the last three months GLD is up 27%:
click to enlarge
Gold is the only currency that has proven it can withstand the ravages of time and public officials. According to Bill Bonner and Addison Wiggin in Empire of Debt:
A gold denarius is still about as valuable as it was when Caesar conquered Gaul.
Contrast that with the US dollar, which has lost 95% of its purchasing power since the Federal Reserve was created in 1913.
With $12 trillion in public debt, $50 trillion to $70 trillion in unfunded liabilities for Social Security, Medicare, and Medicaid, $8.5 trillion in new money created in 2008, and a $2 trillion budget deficit in 2009, it should leave us all with a sense of bewilderment. Is our government falling down the same trap as every other that has issued paper currency in history? Or is this fancy, high stakes game of financial craps going to work out and leave us all better off in the end?
The gold market is starting to bet against the politicians and bureaucrats. My guess is that it will continue to do so and gold may soar to parity with the Dow Jones Industrial Average. That’s simply my guess, of course, but my portfolio rests firmly on that thesis. I don’t buy the elaborate arguments with big words and complicated phrases like “quantitative easing,” “reserve currency,” and “velocity of money.” In my simple mind, if you expand the money supply while productive output declines you debase the currency. When paper currencies go, gold gets going.
Nonetheless, with all the emotional opinions on both sides of the argument, playing the gold market is becoming increasingly risky. Regardless of which side you play, it is worth buying insurance in case you’re wrong. Personally, I have begun hedging my gold bets with long term (January 2011) put options on GLD. I bought them significantly out-of-the-money (OTM) to act as nothing more than catastrophe insurance.
There are a few other ways to hedge gold:
- UltraShort Gold ProShares (GLL)
- Buy puts / sell calls on GLD or GDX
- Sell futures (ZG or YG) or trade futures options
With only $23 million in net assets, I’m not a fan of GLL; however, a quick look at its pricing chart shows that it does a decent job mimicking the double inverse of GLD.
GDX is a composite index of gold miners, so its price has dependency to equity markets. If inflation kicks in it could boost nominal equity prices and GDX could benefit from both gold and equity gains. Deflation and falling gold prices could have the reciprocal effect.
Futures options for gold contracts present a rather illiquid market, unfortunately. Best to stick with GLD put options if you want to hedge gold prices. You could sell calls, but then again, if you’re right it would be a shame to limit your upside.
Disclosure: long GLD, long GDX, short GLL
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Clyde: You got to see the video I posted from Paul Grignon. The profits are possible and if they are there, they are being taken by the bankers. Unfortunately for them, they screwed recently up big-time. Now they're broke. I saw those bankers talk in front of Sen. Frank. They were each fantastic guys doing their best. I like those guys and want to invest in them. But --- let Uncle Sam buy those banks for 10 cents on the dollar. Then I'll put in my two cents.
Rob: "Bank shares are low for a reason. If it made sense to buy into these companies private capital would do so."
Clyde: Exactly. Private capital is not going to buy bank shares and for good reason. The banks screwed up! They are worth NADA. This has created the opportunity of a lifetime for Uncle Sam and us.
Rob: "Ultimately, decisions made with your own money involve greater circumspection than political decisions with other peoples' resources."
Clyde: That's why Uncle Sam will be leaving the banking infrastructure whole. But we will OWN them and their interest and profits.
Rob: "The same logic could be extrapolated to lead us towards outright communism, full public ownership of everything. There's a reason that kind of economic model fails. Even countries that call themselves communist, like China, do not practice real communism."
Clyde: I agree. The real problem with communist was (and is), that the individuals in charge are still "human" and therefore on the average a bunch of crooks. It's too bad that human beings on the average are such a bunch of crap, otherwise getting rid of the Kings and Queens would have been fantastic! We replaced them almost word-wide with a bunch of nincompoops. Human beings need to do a better job at choosing leaders and then getting involved.
Rob: "Other than the utilitarian reasons against nationalization, how about legal ones?"
Clyde: Where in the constitution is it written that Americans must be the slaves of the Federal Reserve? You didn't view the that fantastic video of Paul Grignon. Come on. It's only 47 minutes and you will be amazed. My pal Wilson knew he was wrong ten minutes after he agreed to this. But it got us into this and there is nothing we change about the past. -- I work within the legal system. If we don't like the laws we change them.
Rob: "Nowhere in the Constitution does it allow for the federal government to raise taxes, issue debt, or print money to procure private businesses. That power is rightfully outside the scope of government."
Clyde: Come on Rob. You'd have made a great gun slinger in 1850. But you and I have to deal with next week!
Clyde: No you're not wrong. You know, I don't have a safe or dog, and I don't have no guns or nutin'. But I would indeed like to buy some real gold! How about this. I'll buy some of your gold at today's price. Please keep it in YOUR safe, 'cuse where I live it's not safe. I'll give you say $100 per week to keep my solid gold. Deal! Just give me a paper that says you got MY gold in your safe.
I'm not kidding -- you have to see the Paul Grignon movie about gold and currency. You will be amazed and it will further your correct opinion that keeping some gold is a good idea--if you can keep it safe. But if everyone did this, the world would be in big big trouble.
Hey, stay positive buddy!
As a side-note, I just want to comment on Nationalizing Banks and our economy in general. This challenging economy is a huge wake-up call to people that slacked on their duty to do what's "right", shareholders need to be more vigilant with with the people in charge, voters need to be just as vigilant with our representatives, this is our country, there our public corporations, they will only be as good as the weakest link. The argument that i'm too busy to deal with that, is what is partially responsible for where were are at today. If we expect our representatives, CEO'S, and others to be responsible and accountable, then, by God, we need to be just as responsible and accountable as well, it's just a mirror of our own reflection, hard as it maybe to look at. Just food for thought.
Profit taking is one thing, getting totally out of Your Gold Negates its Insurance Value. Being unprotected, even for a couple of days, is nonsense during this tumultuous period.
So this comment (Jan.27) asking for help was, at best, misleading:
"I have held physical gold for 15 years. Having slowly accumulated my position, I am now wandering about an exit point. What metric should I use to determine the optimal price for a conversion into bonds and equities?"
Too bad you weren't forthright from the beggining.
At least now I know what you are.
We are not that far apart on most issues. I cannot understand your vitriol.
You asked for help, I gave what I thought was useful.
Only a few tried to help you.
Your Comment stream went from "help me" to This Is the Way it is.
I do not take kindly to be taken for a fool.
Unforetunately, there are people here who will act on your comments. By the time, they read that you have changed your mind, you will have hurt many.
I guess that is what I have against your posts. They do not disclose what your stop loss provisions are.
My guess is that you may already be out of the "Sell Gold and Silver", using last Friday's prices, position.
Will you go to multiple articles to post a new direction?
I doubt it.
As far as I'm concerned, that's all I will ask of your future Buy/Sell comments, "What will trigger a reversal in position"?
If it makes you feel any better I got burned in my trading account by the swift move up last night in asian gold trading.
That "John Galt" comment of mine was made because it was the first time that I had seen it.
I like a level playing field, had I known you were a Pro with a bent for "Tongue in Cheek" humor, I would not have gotten bent out of shape.
So, I appologize.
There is an idiot wandering about who believes Inflation started in 1913 so Gold should be worth around $455.
Also, if you look at home values, credit lines, 401K's etc., we have seem trillions and trillions of dollars of net worth disapear. The government can barely pass a bill for 800 Billion to be paid out over the next couple years. That sounds like a formula for deflation vs. inflation. In a deflationary environment, each dollar becomes more rare and valuable. Therefore the # of dollars it takes to buy a gold bar goes down. Based on this, I think this would be a bad time to invest in Gold.
You do not buy gold to take to the grocery. You do take a coin to a dealer, convert it to cash, then buy your groceries and whatever you want for a period of time.
It should be bought by everyone as an insurance policy against stupid government. Right now it should be bought, also, by serious traders that are nimble enough to profit from this historic move in price.
Good luck!
Especially worrisome was today's activity in ABX. It closed Down on the Day.
phdinsuntanning links to Government intervention in Gold Markets specifically mentioned ABX. Its Chart was picture perfect with GLD until the recent move in Gold, last 2 weeks. I do not know what to make of it.
On Feb 16 12:46 AM Nathaniel C wrote:
> Now is not the time to be hedging your gold position. Gold is doing
> exactly what it is supposed to be doing: going up because currencies
> are being debased worldwide. Also, gold has officially decoupled
> from the US dollar. This is a clear buy signal. I am not a gold bug
> but I am long gold and the gold miners. There are few things working
> in this market and gold is one of them.
On Feb 17 06:30 PM yellowhoard wrote:
> Gold is a store of wealth. It has no counterparty risk. It is easily
> transportable. It cannot be synthesized. As governments print paper
> to solve problems, and they always do, it takes more paper to buy
> it.
>
> You do not buy gold to take to the grocery. You do take a coin to
> a dealer, convert it to cash, then buy your groceries and whatever
> you want for a period of time.
>
> It should be bought by everyone as an insurance policy against stupid
> government. Right now it should be bought, also, by serious traders
> that are nimble enough to profit from this historic move in price.
>
>
> Good luck!
Markets have a great way of fixing malinvestment...they liquidate bad assets and businesses. No need to have angry peasant mobs persecuting banking executives, just let the companies fail. What right do any of us have to seize the private property of shareholders? All because some of us feel smarter than others and think we should take control of "everyones best interest"?
The Constitution delineates specific powers of the federal government. Taking over banks is not one of them. It is arguable whether or not the Federal Reserve is either.
On Feb 14 11:22 PM ClydeDNA wrote:
> Rob: "Nationalizing banks will decrease profitability as bureaucratic
> inefficiencies take hold."
>
> Clyde: You got to see the video I posted from Paul Grignon. The
> profits are possible and if they are there, they are being taken
> by the bankers. Unfortunately for them, they screwed recently up
> big-time. Now they're broke. I saw those bankers talk in front of
> Sen. Frank. They were each fantastic guys doing their best. I like
> those guys and want to invest in them. But --- let Uncle Sam buy
> those banks for 10 cents on the dollar. Then I'll put in my two cents.
>
>
> Rob: "Bank shares are low for a reason. If it made sense to buy into
> these companies private capital would do so."
>
> Clyde: Exactly. Private capital is not going to buy bank shares and
> for good reason. The banks screwed up! They are worth NADA. This
> has created the opportunity of a lifetime for Uncle Sam and us.<br/>
>
> Rob: "Ultimately, decisions made with your own money involve greater
> circumspection than political decisions with other peoples' resources."
>
> Clyde: That's why Uncle Sam will be leaving the banking infrastructure
> whole. But we will OWN them and their interest and profits.
>
> Rob: "The same logic could be extrapolated to lead us towards outright
> communism, full public ownership of everything. There's a reason
> that kind of economic model fails. Even countries that call themselves
> communist, like China, do not practice real communism."
>
> Clyde: I agree. The real problem with communist was (and is), that
> the individuals in charge are still "human" and therefore on the
> average a bunch of crooks. It's too bad that human beings on the
> average are such a bunch of crap, otherwise getting rid of the Kings
> and Queens would have been fantastic! We replaced them almost word-wide
> with a bunch of nincompoops. Human beings need to do a better job
> at choosing leaders and then getting involved.
>
> Rob: "Other than the utilitarian reasons against nationalization,
> how about legal ones?"
>
> Clyde: Where in the constitution is it written that Americans must
> be the slaves of the Federal Reserve? You didn't view the that fantastic
> video of Paul Grignon. Come on. It's only 47 minutes and you will
> be amazed. My pal Wilson knew he was wrong ten minutes after he
> agreed to this. But it got us into this and there is nothing we
> change about the past. -- I work within the legal system. If we
> don't like the laws we change them.
>
> Rob: "Nowhere in the Constitution does it allow for the federal
> government to raise taxes, issue debt, or print money to procure
> private businesses. That power is rightfully outside the scope of
> government."
>
> Clyde: Come on Rob. You'd have made a great gun slinger in 1850.
> But you and I have to deal with next week!
On Feb 14 11:22 PM ClydeDNA wrote:
> Rob: "Nationalizing banks will decrease profitability as bureaucratic
> inefficiencies take hold."
>
> Clyde: You got to see the video I posted from Paul Grignon. The
> profits are possible and if they are there, they are being taken
> by the bankers. Unfortunately for them, they screwed recently up
> big-time. Now they're broke. I saw those bankers talk in front of
> Sen. Frank. They were each fantastic guys doing their best. I like
> those guys and want to invest in them. But --- let Uncle Sam buy
> those banks for 10 cents on the dollar. Then I'll put in my two cents.
>
>
> Rob: "Bank shares are low for a reason. If it made sense to buy into
> these companies private capital would do so."
>
> Clyde: Exactly. Private capital is not going to buy bank shares and
> for good reason. The banks screwed up! They are worth NADA. This
> has created the opportunity of a lifetime for Uncle Sam and us.<br/>
>
> Rob: "Ultimately, decisions made with your own money involve greater
> circumspection than political decisions with other peoples' resources."
>
> Clyde: That's why Uncle Sam will be leaving the banking infrastructure
> whole. But we will OWN them and their interest and profits.
>
> Rob: "The same logic could be extrapolated to lead us towards outright
> communism, full public ownership of everything. There's a reason
> that kind of economic model fails. Even countries that call themselves
> communist, like China, do not practice real communism."
>
> Clyde: I agree. The real problem with communist was (and is), that
> the individuals in charge are still "human" and therefore on the
> average a bunch of crooks. It's too bad that human beings on the
> average are such a bunch of crap, otherwise getting rid of the Kings
> and Queens would have been fantastic! We replaced them almost word-wide
> with a bunch of nincompoops. Human beings need to do a better job
> at choosing leaders and then getting involved.
>
> Rob: "Other than the utilitarian reasons against nationalization,
> how about legal ones?"
>
> Clyde: Where in the constitution is it written that Americans must
> be the slaves of the Federal Reserve? You didn't view the that fantastic
> video of Paul Grignon. Come on. It's only 47 minutes and you will
> be amazed. My pal Wilson knew he was wrong ten minutes after he
> agreed to this. But it got us into this and there is nothing we
> change about the past. -- I work within the legal system. If we
> don't like the laws we change them.
>
> Rob: "Nowhere in the Constitution does it allow for the federal
> government to raise taxes, issue debt, or print money to procure
> private businesses. That power is rightfully outside the scope of
> government."
>
> Clyde: Come on Rob. You'd have made a great gun slinger in 1850.
> But you and I have to deal with next week!