The Bull Case
SPDR Gold Trust's (GLD) biggest chance of bucking the recent lull in gold is QE3, but easing addicts need to calm down. Buying in anticipation that the Fed might hint at easing is counterproductive. The focus on easing also focuses on other chances that will lead to gold rising. The U.S. fiscal cliff is looming over the world, and if Congress decides to play chicken again it could do serious damage that might force the Fed into action. The Euro Zone still has not sorted out its problems. The fall of Spain might continue, and Italy could still go the way of the Roman Empire. A combination of these two would be amazing for gold, because it sow fear and hurt the dollar as a safe haven. I have listed three things that could drive gold up, and then had them flow into each other to keep some kind of a super move. Things are interconnected, always keep that in mind. If you spot the first domino falling, you could make a lot of money down the road.
The Bear Case
GLD is not a no-brainer long situation though. I am sure you have heard of the gold death cross. That is a pretty rough technical indicator. There are some serious downside risks. We might be scraping the bottom, or we might punch through support and fall further. There are not as many headline gripping catalysts as for the upside case. The story of a GLD decline is likely to be because of the silence. Last year speculators were so hot for gold. Owning gold was the way to go considering the ever lurking specter of inflation. Now it seems like many of these speculators have lost interest. Perhaps they were scared off to the yen or some other safe haven. Most of the investment theses of the most hardcore gold bugs were amusing. With the type of chaos they were envisioning there was no safe haven "traditional" asset. They should have been preparing for a Mad Max type world. Water and guns would be the way to go. Let us, for the sake of our futures, strike a more sober note.
The Option Entry
Gold does not really have many fundamentals, so there is not much more to say with regard to the drivers of gold. Let us contemplate how to make money from GLD with so much uncertainty. My strategy would be going for some long dated calls and puts. Depending on your expectations you can stagger the dates.
Originally I was very bearish on gold, because I think its status as a safe haven approached the utterly ridiculous. It is fine to have it as a part of your portfolio, even a substantial part, but to think that putting your cash into gold was the ultimate protection did not convince me. However, the macroeconomic climate has me flipping slightly, and cautiously, bullish. I would want my GLD calls to be cheap, and far enough in the future to capture all the catalysts that could come about, which gives me time to think about the developments. January 2013 LEAPS would be my choice. I would choose a high strike of $175 because I do not want to put too much capital at risk. These went for $2.26 as of close Thursday July 19, 2012. The other reason to go further out for the strike of the calls is that the upside catalysts are extreme events. Fiscal cliff, Euro member collapse, Euro collapse, or QE3 are the kind of catalysts I am basing this trade on. These are extreme enough that I can choose to go further out, especially since I have the benefit of time.
However much I picked up for the calls I might take 1/3rd of that and buy some puts at the $145 level, this just depends on if I can get in at the right level. Right now they are at $4.30 and that is too much for me. I'd rather just manage my call position and make it small enough that I won't need a hedge, but that is just me you might choose differently. Imagine a world where the politicians get their house in order. Try not to roll your eyes too hard when you read that. Gold could be in real trouble, which is one of the risks for the calls. The other is that this $150-$156 area is where we are at months from now. That would be awful for options too. You should always be cognizant of the risks to your trades. There are no guarantees, and if you know that then you should position yourself with that in mind.
The Reason for Using Options
I think that is pretty much it. The reason I like this instead of outright buying or shorting, is that I can do both for a lot less. Also it protects me from suffering severe loss and with all the uncertainties regarding the catalysts I prefer it this way. I am risking 100% of what I put in but I am capturing hundreds of shares of movement for pennies on the dollar compared to buying or shorting the shares. It instills some discipline. I could lose on both sides, and that is it. My position is closed out. I do not have to decide on a capitulation point or pray for a bounce. I walk away having chosen my maximum loss at the outset. There are times when I would buy shares, see my other articles. However, this is one that I would play both sides through derivatives.
Additional disclosure: I am going to wait more than 72 hours to evaluate the LEAPS. I would go with options, and might be on both sides if the price comes down.