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David Batson
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Mr. Batson thinks the most important fundamental that ought to be considered when analyzing liquid assets is the necessary multidecadal trade-off in outperformance between stocks and commodities. This is a natural part of the business cycle that allows supplies of raw materials to be increased... More
  • Sell Your Gold (And Have It, Too) 0 comments
    Dec 1, 2013 10:52 PM | about stocks: GLD

    I was talking to my good friend Mr. X this weekend and he notes that it seems like the entire world has gone bear on gold. Those who have been permanently negative on the yellow metal (i.e. the Goldman Sachs of the world) are pushing their short sales. Those who actually understand the fundamentals are not selling, but aren't excited about buying either.

    Perhaps, then, this is a moment when I could gain some traction with something I have been talking about for years: using the futures markets to hedge exposure to physical gold. It isn't that those I have suggested this to in the past think it is a bad idea. They have just been indifferent to it for the most part. Perhaps they will consider the idea now, at least for future reference.

    What if in the past two years, someone with, say, 1000 ounces of gold had been short of three 100 ounce COMEX gold contracts, hedging 30% of their exposure? That would have been a pretty good deal. They would have experienced what is currently a 35% setback in the price of gold from its all time high in September 2011 as only a 23% drawdown in their personal exposure.

    What if, at various times, our investor had increased that to seven 100-ounce COMEX gold contracts short, hedging 70% of their exposure to phyiscal? They could have worked that loss even lower. Additionally, they could have taken the profits from their short sales and turned around and bought more physical gold.

    Now, one of the first questions that usually comes up when this is suggested is, "Why don't I just sell my gold?" The reason is, you are going to want physical gold several years from now. Whether it is a worst case scenario where you get a major collapse in the dollar and people are demanding hard assets in payment for basic goods and services or it just LOOKS like that is going to become the case, having physical precious metals in your possession is going to become widely appreciated (which will, ultimately, drive the final highs in prices).

    The other question that often comes up is, "Why hedge only 1/3 or 2/3 of my physical?" The answer is, the fundamentals have it going up. You don't want to get into a situation where you are fighting against your own proper understanding of reality. That creates internal conflicts which can do things like keep you up at night.

    Of course, it's hard to do this on your own. Better to seek someone out who has the experience to execute such a strategy. I have been trading futures contracts for more than a decade, always with an emphasis on precious metals. I am currently seeking clients who fit the definition of Qualified Eligible Persons. The best way to contact me is through my email: davidbatsoncta@gmail.com

    Stocks: GLD
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