Managing Editor

Jeffrey Christian: Gold and Silver Could Spike

Jake -

Keep in mind the format of this article was an INTERVIEW, not an analysis. The "star" in an interview is the interviewEE, not the interviewER.

An interviewer's goal is to get the interviewee to offer his/her insights and opinions.

There's plenty of analysis elsewhere on HAI. As examples, I direct your attention to "Consumers Buy Into Inflation" at www.hardassetsinvestor... and "Venti-Sized Gains For Coffee" at www.hardassetsinvestor....


On Nov 16 01:31 AM Jake2 wrote:

> "HAI: Everyone I talk to is bullish on gold. I wonder: What could
> go wrong? What could keep gold prices down?"
> You"ve been talking to the wrong people. What's wrong is no one is
> buying. Didn't someone tell you? Gold is down 14% in the past few
> weeks. How about some hard headed analysis from Hard Assets once
> in a while instead of tendentious twaddle.

Gold (and Gartman) Haunting Some Investors

An at-the-money option would have a delta around .50 unless you're on the eve of expiration (when delta would be zero). Delta DOES matter. Greeks DON'T disappear at expiration. An in-the-money option at expiration would have, for example, a delta of 1.

Time premium is predicated upon volatility assumptions. All of the other inputs in an option price model could be similarly perceived by all market participants; the one variable that's unique to each trader is the forecast for the asset's volatility over the option's life.

There were no other time frames to consider for DZZ's performance when the hedge presentation was made. What you saw in the example was performance from inception. An update on DZZ's post-conference performance can be found on the Hard Assets Investors site at "Did You Hedge Your Gold Stocks? (www.hardassetsinvestor...) .

The purpose of a hedge is just that ... to hedge against an unacceptable risk. If one didn't anticipate rough sailing ahead, or if one wasn't facing some other circumstance that precluded sale of an asset, one would remain unhedged. But there are times when assets must be held in tempestuous markets . An investor, for example, who's already taken a full complement of short term losses for the year might want to hold gold mining shares until they qualify for long-term capital gain/loss treatment.

There's no presumption in the presentation that alpha is positive. Excess returns can be, and as we've seen often, ARE negative. In this case, a negative alpha would be symptomatic of management's failure to beat the performance of the gold market. Beta's a matter of perspective. There are, in fact, TWO betas associated with gold mining stocks: equity risk, which can be hedged with a stock index product AND gold risk, which is addressed by DZZ. There's still plenty of beta in Hecla even after hedging with DZZ.

As for taking a "married" position (gold mining issues plus DZZ) at the outset, that's purely an alpha play. You'd be treating the mining issue as you would ANY equity issue. If you were looking for gold performance, buying gold itself would be more efficient.

Gold (and Gartman) Haunting Some Investors

An option trader who fails to appreciate the risk factors represented by the greeks is flying blind.

Without considering delta, at least, how can you determine a hedge ratio? You won't get dollar-for-dollar price tracking between the option and the stock until the option's deep in the money.

GDX was used in the article above as a proxy, not as a trade recomenedation. Look at the examples given in the "Hedging Gold's Volatility" article and you'll see how the DZZ hedge worked against individual mining stocks and a small non-GDX portfolio. Alpha could, indeed, be stripped out.

Gold (and Gartman) Haunting Some Investors

Riskwise, owning a put against stock held long is, indeed, a synthetic long call. Diagram the risk/reward payoffs of a synthetic and a "natural" call with the same effective strike price and you'll see they're identical.

There are more unknowns embedded in options than in stocks. Each of these "greeks" (delta, gamma, kappa [vega] and rho) is a variable risk factor that influences the option's price trajectory. The only "insurance" one has is in the expiration pay-off. One pays for it through the premium. Option premium must be paid to roll the insurance forward. No premium is attached to the purchase of stock.

Don't get me wrong. I'm a big believer in options. But not everyone else is.

The hedge example presented at the Hard Asset Conference was directed at shareholders who bought gold mining shares in the belief that their stock would outperform bullion. Hedging out gold's influence with DZZ does NOT negate the upside, it merely isolates the outperformance in the stock (if any) that isn't attributable to gold's movement. You'll see this illustrated in the examples presented in the "Hedging Gold's Volatility" article. The proposed hedge, in fact, relies upon this "mismatch" to allow the stock's alpha to filter through.

There were no GLD options extant at conference time and GDX options would hedge away the very alpha stockholders wanted to preserve.

Gold (and Gartman) Haunting Some Investors

Let's go back to the focal point of the article for a moment. The fact that the DZZ-hedged position in GDX still returned a loss says one of two things (or both):

1) The hedge ratio needs to be adjusted dynamically, and/or

2) There's something "wrong" with the management of the companies making up the underlying index.

If the hedge ratio remains constant over the life of the hedge, gold's influence from GDX should be negated, allowing the underlying companies' management "alpha" to emerge

There was an 8 percent residual loss after hedging. A little number-crunching should tell you if it's the fault of the hedge or of company management.

Gold (and Gartman) Haunting Some Investors

Silveraxis -

Put options are indeed an possibility, though they come with a whole new set of considerations. DZZ offers twice the inverse return of its underlying index without an extrinsic cost. That's a degree of leverage that exceeds that of an at-the-money option.

An option is a wasting asset; if it's out of the money at expiration, the put premium is forfeit. Holding a GDX put with GDX shares, in effect, creates a long call on GDX. And, as we all know, calls can sometimes expire worthless.

There's no such cost in DZZ. Neither is there an expiration, so rolling costs are eliminated.

The Swissie and Gold

GMiki -

There's no representation made here that the Swiss franc is "better" than gold.

Rather, we observe the degree to which a currency is "pegged" to the dollar against its gold-denominated value.


Investors dealing with international assets, including those holding foreign stocks and bonds, or mutual funds holding such assets, are, by default, in the foreign exchange market. Each time they buy an offshore stock or bond, they're selling dollars to buy francs or yen or euro, depending upon the home currency of the target security.

Aren't they entitled to know the value they're obtaining when they make such investments?

To say that the period cited isn't relevant because it's a "consolidation period" smacks of data mining. If we only report data that supports some preconceived notion, we have no credibility as dispassionate observers.

If you'd followed the articles embedded link to "Translating Currencies Through Gold," you would have seen a graph and supporting data on THREE YEARS of currency/gold valuations.

Play Your Short Game in Gold

GMiki -

COMEX June gold had last settled at $894.50 when you wrote your comment. Three trading sessions later, the contract settled at $869.20.

Some might consider a $2,530 return a nice short. At exchange minimum margins, that's a 59% gain.

Those Stubborn Silver Investors

For the week ending Thursday, the gold/silver ratio widened 1.4% to 52.6-to-1. The ratio last peaked at 57.3-to-1 in December before tumbling to 47.4-to-1 in early March as silver and gold reached their record-setting zeniths.

Those Stubborn Silver Investors

The "trend" to which I refer, silver wink, is the price action that puts an investor underwater.

Silver's price appreciation, prior to the break in March, was more robust than gold's. Even though silver's subsequent decline was steeper, silver was still holding on to a respectable year-to-date gain through April 30 (10.3% vs. gold's 0.7%).

If THAT differential closes, I'd expect to see SLV redemptions rise.

Those Stubborn Silver Investors

The point of the article? Simple: to add context to the stories circulating about the trusts' vault levels. People have been latching onto ideas without much perspective.

That's all.

The Long and the Short of Silver and Gold

Nate, the HAI article linked to this story ("What's Better: Gold or Silver?": hardassetsinvestor.com...) contains a table tracking the gold/silver ratio through the 20th and 21st centuries.

If you want finer grain detail of modern-day prices, try the historical statistical archives of the London Bullion Market Association at www.lbma.org.uk.

The Long and the Short of Silver and Gold

Misterchan, DGZ and DZZ are exchange-traded notes (ETNs) issued by Deutsche Bank that track the 1x (DGZ) and 2x (DZZ) the inverse of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold.

ETNs differ from exchange-traded funds (ETFs) in that they are senior, zero-coupon debt instruments rather than representing a portfolio of futures like the PowerShares DB commodity funds.

As zero-coupon notes, they pay no interest. Issued at $25 pe back in February, their value fluctuates based upon the return of the underlying index. The are tradeable intraday and price-transparent as are ETFs.

At present, there's no tax consequence for holding these ETNs (until liquidation, that is), giving them a decided advantage over gold ETFs like DBG and grantor trusts such as GLD or IAU.

More information can be found at: dbfunds.db.com/notes.

The Good, the Not-So-Bad and the Ugly Commodites ETFs

No worries. UCR and DCR are novelties as far as oil ETFs/ETNs go. They're issued in tandem as complementary sides of a trust made up of credit instruments.

When you deal with the MacroShares products, you're taking on a huge tracking error risk. Tracking spot WTI can be hard enough for "old-fashioned" oil ETFs/ETN when the market's in contango.

The Good, the Not-So-Bad and the Ugly Commodites ETFs

Thanks for your insights.

Look back on the article, though. It says: "SOMEDAY (emphasis added) the commodities tower will topple leaving imprudent investors who've OVERSPENT (again, added emphasis) on commodities vulnerable ..."

Note I haven't said WHEN the reversal of fortunes will occur. To think that commodities will remain in the ascendency indefinitely denies history. Commodities prices and inflation are cyclical, to wit:

Commodity vs. Stock Bull Markets

US Stock Market Producer Price Index
Composite (All Commodities)

1898-1920 61% 228%
1920-1929 196% -38%
1929-1951* -12% -58%
1951-1965 256% 6%
1965-1981 49% 204%
1981-2001 828% 37%

*Includes anomalous effect of the Great Depression (1929 – 1940)
(Source: Legg Mason)

Without market timing, overexposure to the asset class can be deleterious to a portfolio with a date-certain horizon. And how good are any of us in the timing department?


I'm not saying one SHOULDN'T have commodity exposure, only that the allocation be prudent.