There Is More Than One Way to Trade Gold

 |  Includes: GDX, GLD, NEM, SLV
by: Michael Shulman

I am not a gold bug. I make fun of people who fear inflation, I make fun of people who think even European governments will let their banks fail, I make fun if people who have gold coins in case the apocalypse comes up on us. Sorry if I offended you. But take heart – I have been recommending buying gold and its cousins for a long time and I am still doing so. Why? First, the fearful are buying and driving up prices and they will continue to do so as long as there is political uncertainty and that uncertainty spills into markets, and that means several years. Second, central banks, especially in emerging nations including India and China, are buying gold. Third, institutional money managers are boosting portfolio allocations to gold from the typical 2%-5% to as high as 15%. And last, as they should be, are the traders, but they get the headlines and that is why the chart readers – remember people who predict fortunes and read palms read charts as well – say we are in a bubble.

Nope. We are not. And here is how to trade gold.

Investing Approach – Buy the (NYSEARCA:GLD) the ETF for gold. Go to the beach for ten years and hope it is higher ten years from now.

Investing with Intelligence Approach - Buy the GLD, put in a reasonable stop loss (down 20% or so, or the last three-month low) and start selling calls. Five seconds after you buy the GLD, sell some monthlies or the weeklies. If you have time, you should be able to put on between 15 and 25 call positions a year, moving in and out as needed. Sell the strike closest, which gives you a fifteen percent gain on the underlying GLD. Buy them back and sell another one, if the math works, as the GLD rises. If it goes down temporarily, buy them back and wait until the GLD rises a bit and then sell them again. If the GLD does not move, you should be creating your own dividend of 1%-15% per annum, probably more.

Trading Without Caution: Buy the calls, and you could make a lot of money. I write two services and the speculative trading service (Michael Shulman’s Short Side Trader, a contrarian service where shorting is state of mind) has done quite well with GLD and related calls. If and when you get busted out of your calls on a reversal, come back to this link and re-read. Then you are ready to sell puts.

Trading with Caution: Sell puts on the GLD and its cousins (more on that in a minute). Sell a put at a strike price at which you would be willing to own the GLD. Since you will ignore this advice, be prepared to “roll” the position if you are near being put the GLD. Subscribers to my other service (Options Income Blueprint) do this all the time and not one position in the history of the service has ever lost one dollar of capital or been put a stock or ETF. No kidding. You just have to be willing to ”roll” a position and tie up your capital a bit longer. Remember, when you sell a put you are not risking capital – you are using it to support a position. Big, big difference from when you buy a put or call. Lower reward but lower risk.

What are the cousins?

The GDX ETF: This is the ETF for gold miners. In part due to pressure on other industrial and mining ETFs, the miners have lagged the GLD ETF and when things stabilize a bit they will take off. Could be a week, could be a year, but they will, they are trading well below the historical norm. Puts and calls on the GDX are very liquid and there are weekly options on the GDX.

The SLV ETF: This is the silver ETF and it ran up, blew up, crashed and is now trying very hard to punch through $40. It will and will race to $50, hit a wall and once speculators are flushed out, will climb back to its historical relationship to gold, which puts it near $80. A short term strategy is to sell puts; over time, if you can handle the volatility, a buy/write strategy – buy the ETF, sell the call – will produce greater returns.

Individual Miners: There are several heavily traded gold miners, the market leader being Newmont Mining (NYSE:NEM). You must have seen the name, on the two days when every stock in the S&P 500 (NYSEARCA:SPY) was down, NEM went up. The stock is very undervalued if you look at its historical relationship to the price of gold. NEM also will increase its dividend a fixed amount based on every $100 increase in the price of gold, a built-in stock accelerator for the foreseeable future. The options are very liquid.

A lot to chew on. And if you break a tooth while doing so, get a crown – a gold crown.