Gold Holders: How to Protect Yourself

A successful ignition of equities will send gold and gold shares to the dustbin. Not because gold and gold shares are worthless investments – on the contrary: because they are the safest harbor to pull into when seas are raging. If investors perceive the storm has passed, they’ll pull up anchor and set sail for the most exotic shores they can find. This is a risk-ready crew a’waiting, and they’re fixing for equity island.

So what to do for those of us who are genuine gold-philes and believe in the long term prospects of the shiny yellow stuff? For starters, keep buying bullion coins regardless the price. But if you can’t – if your only options are ETFs and mining shares – it’s time to do a little hedging.

Take a look at the chart:

click to enlarge

This is the London daily gold fix for the last two years. It’s a little different from the NYMEX gold futures chart, and since we’ve discussed the benefits and pitfalls of charting both in past installments, we won’t bother getting into it here. Suffice to say it’s a fair reading of gold on a daily basis.

The chart shows three runs at $1000 gold, two of which proved unsustainable and a third which appears to be faltering as we write.

Not only this, but despite the rise in bullion, gold shares, too, have been weak. Look here:

We can argue whether the HUI is truly representative of gold shares, whether the XAU is a better proxy, or GDX, or the Toronto Stock Exchange’s XGD – but why bother. The shares have failed to keep pace with bullion as the chart above plainly indicates. That means gold is losing steam. It means that gold shares, which are supposed to be leveraged to the gold price, don’t believe the current rally in bullion. Let the numbers prove me wrong.

That being the case, gold holders need protection, and it can be gotten in a number of ways.

• First, by selling calls against your current mining shares. If you’re not going to sell at this point, it makes sense to collect some income off the buggers as they fall – reduce your purchase cost as well. And if we’re wrong and the shares rise, you’ll still profit when your shares are called. Go out to April and sell roughly 10% out of the money calls.

Or:

• Sell the bullion and buy the miners – a sort of arbitrage that sees a profit as the gap between the two closes. Buy puts on GLD and calls on GDX. Get the longest dates you can find.

Or:

• Just buy some calls on the Proshares UltraShort Gold ETF (GLL). That should offer you some rather inexpensive ultraleveraged insurance on gold shares dropping.

All in all, we’re for gold. It’s the only real money out there. But in the meantime, we’re against dead money.

Disclosure: none

Comments

[Mad Hedge F...:]

Gold finally hit a wall just above $1,000, and instantly melted $80. For many traders who got in just above $700 three months ago, it’s time to say thank you very much to Mr. Market and either wait for a substantial pull back, or go on to the next trade. It was taking increasingly larger purchases of physical gold by ETF’s and coins by individuals to push the price up. CME statistics showed the speculators’ position soared to a net long of 215,661 contracts ($21.5 billion). The SPDR Gold Trust ETF (GLD) added five tonnes of the barbaric relic to 1,029 tonnes in just one day. The turnaround neatly sets up a double top on the long term charts with the high set last year. It may take a couple of more runs, and more bad news, which seems in abundant supply, to get the yellow metal to a true new high.

Feb 26 12:08 PM

[Gardener:]

"For starters, keep buying bullion coins regardless the price", is shockingly poor advice for any investment. Given your profile you should know better that price does matter.
Buy the dips and monitor the market and your charts in a responsible fashion before blindly buying anything. Good luck to you all.

Feb 26 12:28 PM

[Cesato:]

I see it differently, there have been may instances in which Gold has tracked the Equity Market in the same direction for a long time and that diminishes the safe harbor argument derived from the Equities sell-off. The point is that Gold became just another asset class without losing its caractheristic of being safe harbor, hedge against inflation and so on and so forth. If one doesn't know anything about Gold but it is being bought by the majority you buy as well, simply because you can dump it anytime by using ETFs, Options, Electronic Trading etc same reason why you bought EUR/USD, Oil and GPB/USD last year. Now the reason why long term investors bought Gold at USD 250/USD 500/USD 675 is not being understood by short-term analysts, however the results, profit wise, have been and will continue being unprecedented unless there was some willingnes for Governments to intervene the market then you can think about massive liquidation, not before.

Feb 26 12:31 PM

[Roger Knights:]

"Gold shares, which are supposed to be leveraged to the gold price, don’t believe the current rally in bullion."

I think the reasons are twofold:

1. There's less speculative frenzy in gold and commodities generally, and thus the miners are lagging because enthusiasm still hasn't gotten out of first gear (buying of the commodity itself).

2. The decline in prices of base-metal commodities like copper and lead has decreased the value of the "credits" those provided to gold miners as by-products of their operations.

Feb 26 12:50 PM

[ROLEXDAYTONA:]

There is no free lunch, protection cost money, HUI GDX underperform, investors lose, they shake of fear, now you propose to pay money for protection.
Sell this short, recover what you lost, forget about your affair with gold.

Feb 26 01:42 PM

[doubleguns:]

Rolex get your head out of the sand before you drown.

Feb 26 03:39 PM

[Gold Barron:]

Buy physical gold and silver and sleep well at night. The beauty about that type of investment is that even if gold and silver fall in price that would mean the economy is good and when the economy is bad or there is inflation, they go up. You cant lose buying gold and silver coins as a long term investment.

Any advice to buy puts or sell calls or whatever is poor advice. Invest in Physical gold and silver.

Feb 26 04:59 PM

[know nothing:]

New highs in gold by the end of the month, thats right, next Friday. What part of "this country is in serious trouble" don't you understand? God forbid a bank run, People who are scared, get unpredictable. What with news like this being released, who would have any faith in anything the goverment says, If FDIC hasn't got 4 trillion dollars, they can't insure everybody's (your) savings in the bank. It doesn't take to much common sense to see,hear,feel, whats happening in our country right now. Safe haven currency? Is not the U.S. dollar, it's Gold and Silver.Enjoy this part of Wall Street Breakfast, in case you missed it!

FDIC poised to fatten fees. The FDIC is expected to more than double the fees it charges banks in an effort to refill the coffers of its deposit insurance fund. The move will protect consumers by bulking up the FDIC's reserves in the event of bank failures, but some government officials worry already-fragile banks won't be able to shoulder the extra costs and have urged the FDIC to explore other ways to replenish the fund. As of the end of Q4, the FDIC had "$18.8B "in its deposit-insurance fund to "protect around $4.8T" in insured deposits. Fourteen banks have already failed in 2009, bringing the total to 35 since July, while 252 banks were on the government's 'problem list' at the end of Q4 vs. 171 in Q3

" HELLO" Do the american people get it?

Feb 27 09:14 AM

[fireball:]

i would love to see gold get a scalping, silver too. it would be a great opportunity to add to what i hold. i doubt it will get hit that hard. i would hope holders would not panic and sell. more dollars, more euros, maybe aussie dollars aren't multiplying so fast. maybe loonies are also better. in the long term it looks like gold and silver physical possession is the best insurance fiat money can buy.
there is the deficit that is spoken of daily....uh... better notice the debt.
also keep in mind that derivatives have only started to unwind. commercial properties have only started to lose value and americans are using credit to pay credit they can't pay.
guess my old dad was right. if you need to borrow you can't afford it. glad i listened.

Feb 27 05:09 PM

[auto44:]

Rolex just says stupid stuff to get attention, like a little kid. I would just ignor him and maybe he will go away.


On Feb 26 03:39 PM doubleguns wrote:

> Rolex get your head out of the sand before you drown.

Feb 27 06:29 PM