The Best Omicron Virus Defense For Your Portfolio: Gold
- Gold was underpriced, under-owned, and undervalued before Omicron arrived.
- Omicron appears to be spreading faster than any other variant, with daily cases rising to 8500 today in South Africa, vs. just 300 three weeks ago.
- A sharp slowdown in the global economy and dive in the financial markets could demand a whole new level of paper money printing in the coming months.
- Gold ETF call options are cheaper than usual, and offer a great angle to hedge wild swings in your portfolio.
I was already getting quite bullish on precious metals, particularly gold, the last few months. Now we have a new COVID-19 variant strain that has the potential to slow down the global economy over the winter. When I move the chess pieces on how governments and central banks the world over may be forced to act in the coming months, an effort like early 2020 to prop up an economy experiencing shutdowns and dramatically reduced consumer spending, enormous new amounts of stimulus spending and money printing seem possible in 2022. At least that’s the “risk” to the markets and economy worth serious contemplation this week.
I mentioned how low an US$1800 price for gold has become vs. other assets, plus basic debt totals and money supply measures here during September. My "fair value" gold target of $2700 for late 2022 appears to be solidly in play, if new lockdowns and consumer spending cliff-diving is coming to America starting in January. (My pandemic modeling, using the South African scale up since early October as a guide, projects high levels of spread for this heavily mutated virus vs. the original beginning in 4-6 week in the U.S.) I know we are in “cry wolf” territory, where investors and readers are tired of people overreacting to each new variant. However, what if the wolf (Omicron) actually is in the chicken coop right now, and we just don’t want to accept it?
South Africa's positive infection case numbers are scaling between 3x and 5x weekly during November, similar to the first days of COVID-19 appearing in China. We are now witnessing a spread rate in parallel to the highly populated Wuhan version, in January 2020 without masks or vaccines or social distancing guidelines. Today, South Africa is 25% vaccinated, and according to today's World Health Organization press conference is much younger and healthier than the populations in America and Europe. We freaked out about Delta’s emergence in late summer, with total infections spreading at a 50% rate per week. Omicron looks to be in the 200% to 300% a week range. The saving grace and hopeful rumor floating around is Omicron is not as destructive and deadly in the end as other variants. That better be the case. If not, South Africa’s medical system will be overloaded in 2-3 weeks, and the same could happen in America during February, March and April.
Image Source: South Africa Official COVID-19 Website, December 1st, 2021
I am modeling all types of scenarios for this variant’s spread across the planet, and its effects on supply chains. Let’s just say they are all bad news for the stock market and the economy. This new variable to digest is in no way a good thing for U.S. financial markets.
I think it is entirely possible individuals will stop spending money, want to work from home, and begin a real debate about sending kids back to school (after Christmas break) by early January. The federal government may have no other choice but to borrow another $2-5 trillion (depending on the severity of stress to our daily lives) for more handouts to citizens and businesses, and the Federal Reserve may have to purchase an equal sum of Treasuries, plus potentially dump another $5-10 trillion into the global banking system, because this time we may all get sick with COVID at the same time!
It is quite a sad economic predicament. If you had told me in March 2020, when we were shutting down the economy for “only a few weeks” to get control of COVID, that the worst of it might not play out for two years until early 2022, I would not have believed you. I just hope this is the only biblical plague God sends our way for a while.
I also apologize, as this article is more me rambling about some of the ideas floating around upstairs. I am sure I am not alone in starting to piece together the mess we may be about to encounter.
So, if this depressing mess is about to hit home in a matter of weeks, worrying about inflation and the value of each dollar might take a back seat for priorities at the Fed. Holding together our society and government during a severe crisis test could very well be next.
We could easily move off the needle of nobody wanting a major gold/silver position in their portfolio – to everyone and their kids and pets wanting one. Big Tech and cryptocurrencies would likely get knocked a peg or two down the desirability board, in favor of hard currency precious metals. Hyperinflation becomes a risk again for 2022-23, and political division could quickly morph into something worse. The question going through my mind is why wouldn’t investors load up on decentralized money and stores of wealth that do not require a computer or internet connection? Who knows, maybe we are on the cusp of huge burst in gold/silver, the main monetary metals hedging chaos in the world and out-of-control paper money printing by the authorities over thousands of years.
The largest and most liquid gold bullion investment for your brokerage account is the SDPR Gold Shares ETF (NYSEARCA:GLD). It is not the cheapest for management expense. In this regard, I like the iShares Gold Trust ETF (IAU) for buy-and-hold positions in portfolio designs. Specifically, in this bad news world outlook scenario, I wanted access to the most liquid and lowest bid/ask spread investments I could find to create lots of gold leverage to "hedge" a panicked marketplace regarding Omicron.
Below I have charted a 3-year period of daily price/volume changes, alongside a few of my favorite momentum indicators on GLD. Basically, gold has been in a nice long-term uptrend since late 2018, and momentum zigzags seem to be supportive of higher quotes next year.
Below I have drawn a 17-month chart to focus on the downtrend from last August’s high price in gold. The interesting part of the GLD story is a triangle pattern of falling highs and rising lows can clearly be outlined since March 2021. And, I have marked with a laser-light show, the failed attempts to break out on the upside since January from a descending high pattern. If we can get some closing numbers above $168, the ETF will have successfully moved above its important 50-day and 200-day moving averages, and all but one of the down-trending lines pictured. A move above $175 will likely highlight a complete breakout from this triangle pattern, heralding Wall Street traders and hedge funds to jump on board. At that point, a strong additional 10% or 20% price gain may happen over the course of a month or two, likely reaching all-time highs, and sucking in tons of new investor interest.
Call Option Hedge Strategy
On the Omicron news, the first go-to investment hedge for my portfolio last week was SPDR GLD call options. Over the past several months, I have been explaining to anyone willing to listen, that call option premiums on gold are trading near record lows, despite all the reasons to own them. The fast-money crowd has completely bailed on gold/silver since their peak in August 2020, in favor of cryptocurrencies and Big Tech investments. I do not think it makes any sense to price 1-year expiration, at-the-money call options with a premium of 6.5% to 7%, when gold has risen +8% compounded annually since 1965, years before we left the gold standard and convertibility for dollars in the early 1970s.
With so many problems in the world, including a never-ending pandemic, record paper money printing by central banks, and record debt levels in western democracies, shouldn’t gold/silver be some of the most valuable assets to own and price in late 2021?
Measured against the all-time high premiums for equity put options in the U.S. stock market since March 2020, the low call premiums on gold look like a real trading disconnect to me. And, this setup represents the opportunity for a successful hedge. If I pay a low price on the call options vs. what they will soon be worth, I can earn a substantial profit, assuming gold trades closer to its fair value of $2700 in 2022. For instance, if gold is about to embark on a rapid 40%-50% advance, owning January 2023 calls at-the-money could return 6x or 7x your investment. And, if gold just climbs 7% over 13 months (less than a regular 55-year gold gain over 12 months) I will get my original investment back. Of course, if gold is flat to lower in January 2023, I will lose the entire invested amount.
In the end, risk-averse investors can buy GLD or IAU for their portfolios to counterweight wild swings in U.S. equities. Or, traders and sophisticated investors can look at call options (with more limited capital allocation and defined downside). Either way, right now is a great time to consider gold bullion.
Do I have my entire net worth tied up in gold and precious metals investments today? Heck, no. In fact, the capital I have invested into GLD bullion call options is not even close to my largest position for sizing. But, I do have confidence that gold/silver bullion will soon trade substantially higher, especially priced in U.S. dollars, if the Omicron variant ravages the world over the next 3-6 months. It’s the best hedge idea I can come up with outside of directly shorting the U.S. stock market, which I am also doing. For the average investor in a tax-deferred IRA or 401(k) design, holding a decent amount of GLD, alongside other gold and silver ETFs looks like a sound risk/reward proposition, as a quick response to Omicron.
Without doubt the name “Omicron” is more menacing and frightening a name for a pandemic virus. The first thought when I heard it was we were being invaded by Transformer-like creatures. COVID-19 is stale and hard to put your finger on. Alpha or Delta are more interesting names, but not really scary. Yet, repeating Omicron over and over again kind of confuses the brain into thinking this one is different.
What’s the downside in gold? Outside of a deflationary collapse that Uncle Sam and the Fed allow to take place, I don’t see more than a $50 or $100 per ounce gold decline as plausible ($5 to $10 in GLD). And, if we get a deflationary tank first in the stock market, which we could, it may not necessarily hurt gold bullion the same as March 2020's stock market panic. Investors are already confused on where to go if they dump stocks. Do they want cash, and its devaluing future with inflation and additional money printing? No, famed hedge fund manager Ray Dalio said as much yesterday. What if everyone turns to gold after selling everything else?
The 1929 and 1987 stock market crashes did not hurt gold bullion much. We had a gold standard in the 1920s, with gold revaluations higher in the early 1930s for a fixed-dollar price. Gold actually rose 10% during the end of 1987, when stocks were crashing 40%. My thinking is gold (and to a lesser degree silver) will be "the" flight-to-quality choice soon, from an undervalued and under-owned point around $1800 in November. Underpriced call options may turn into a terrific bet and hedge for your portfolio. I now hold a slew of GLD strike prices and expiration dates between December 2021 and January 2023.
Remember, this is a hedge idea, which will benefit most under worst-case Omicron spread and severity scenarios. I am praying the hospital and death numbers in South Africa in future weeks tell a more optimistic story. However, if huge headwinds for the global economy are next, you will have some portfolio protection and sleep better at night.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GLD, IAU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.