Gold Holders: How to Protect Yourself

February 26, 2009 | By: Matt McAbby

A successful ignition of equities will send gold and gold shares to the dustbin. Not because gold and gold shares are worthless investments – on the contrary: because they are the safest harbor to pull into when seas are raging. If investors perceive the storm has passed, they’ll pull up anchor and set sail for the most exotic shores they can find. This is a risk-ready crew a’waiting, and they’re fixing for equity island.

So what to do for those of us who are genuine gold-philes and believe in the long term prospects of the shiny yellow stuff? For starters, keep buying bullion coins regardless the price. But if you can’t – if your only options are ETFs and mining shares – it’s time to do a little hedging.

Take a look at the chart:

click to enlarge

This is the London daily gold fix for the last two years. It’s a little different from the NYMEX gold futures chart, and since we’ve discussed the benefits and pitfalls of charting both in past installments, we won’t bother getting into it here. Suffice to say it’s a fair reading of gold on a daily basis.

The chart shows three runs at $1000 gold, two of which proved unsustainable and a third which appears to be faltering as we write.

Not only this, but despite the rise in bullion, gold shares, too, have been weak. Look here:

We can argue whether the HUI is truly representative of gold shares, whether the XAU is a better proxy, or GDX, or the Toronto Stock Exchange’s XGD – but why bother. The shares have failed to keep pace with bullion as the chart above plainly indicates. That means gold is losing steam. It means that gold shares, which are supposed to be leveraged to the gold price, don’t believe the current rally in bullion. Let the numbers prove me wrong.

That being the case, gold holders need protection, and it can be gotten in a number of ways.

• First, by selling calls against your current mining shares. If you’re not going to sell at this point, it makes sense to collect some income off the buggers as they fall – reduce your purchase cost as well. And if we’re wrong and the shares rise, you’ll still profit when your shares are called. Go out to April and sell roughly 10% out of the money calls.

Or:

• Sell the bullion and buy the miners – a sort of arbitrage that sees a profit as the gap between the two closes. Buy puts on GLD and calls on GDX. Get the longest dates you can find.

Or:

• Just buy some calls on the Proshares UltraShort Gold ETF (GLL). That should offer you some rather inexpensive ultraleveraged insurance on gold shares dropping.

All in all, we’re for gold. It’s the only real money out there. But in the meantime, we’re against dead money.

Disclosure: none

To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold to find out more. You may Sell Gold to us too.

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