bearfund

Does GLD Inventory Affect the Price of Gold?

Bluehorses, speculating on such volatile instruments on that time scale seems all but impossible to me. It's difficult enough to know how much money Federal Reserve Notes will be worth tomorrow morning, much less 7 months from now.

Options on GLD are nifty but of very limited value. Based on the number you're asking about, I assume you're considering some sort of call position. But gold calls in particular seem pointless to me. If you're long the metal then writing calls against it is silly; you're holding it because you don't want to hold anything else or because you fear hyperinflation or collapse. The last thing you want to risk is having your gold called away for some worthless paper right when you need it most. It's like writing a call on an insurance policy. Likewise, owning calls doesn't make much sense to me because all the most bullish theses for gold imply extreme counterparty risk in derivatives markets. You may hold a call "worth" 100x as many dollars as you paid for it only to find when expiration day rolls around that there is no way to collect.

If I wanted to use options to speculate on gold, I'd write deep in the money puts. But that ties up a lot of capital, and that capital is going to be eaten away by inflation while you wait for the option to (hopefully) expire worthless. You'd be better off just buying a futures contract on margin and letting inflation work for you by eating away at your debt while your asset (hopefully) grows in value.

Frankly, I don't care for any of these strategies. There are two uses for gold. First, it's money, a reliable emergency savings account that in exchange for not paying any interest will protect you against disaster. Second, along with better-quality currencies like (today) AUD, NOK, CHF, and, if you can get it, CNY, gold is a good way to denominate part of your uninvested cash when real interest rates on dollars are negative.

There are plenty of chartists who claim you can make a lot of money trading gold on technicals. The volatility is certainly there but it always seemed to me that it is mostly driven by external shocks. Looking at the original question posed by the author, sure enough there's another pennant forming up. But which way will it resolve? I don't know...but I do know which way it would resolve if Israel bombed Iran or the Fed had raised rates. I'd rather not roll the speculative dice on 7 months that will include a US presidential election, the confirmation or refutation of the recession thesis, an end to major bank write-downs or fresh bank failures, and Congressionally-mandat... CFTC rules changes. Instead, the macro trends that have me bullish on gold are firmly in place and no short-term event, however dramatic, will change them by itself. Will I reduce slightly on spikes? Yes. Will I add on dips? Yes. But I'm not going to place short-term directional bets and I'm never going to be without my core physical assets. Anything can happen out there, and usually does. To each his own, of course, but understand that any answer to your question is no better than flipping a coin.