LarryS

Gold strategy

84 posts in this topic

$1200/oz today. I think I'll have a nice glass of wine tonight. :P

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... I think the most consistent economic factor in my lifetime has been the decline of the dollar.

During my childhood in the 1950s, you could mail a first-class letter for 3 cents. Most paperback books cost 35 cents. Many hardcover books sold for $ 1 or $2.

My father, a skilled machinist, earned $8,000 a year. That was enough to support a family of four in comfortable middle-middle-class style, owning a nice 2-story house in a good neighborhood.

I had to smile at a younger friend of mine, born in 1964. One of his jobs is to go around emptying coins from vending machines. At a dinner a few months ago, I rattled (for the sheer pleasure of it) a few of the silver coins I'd bought earlier that day at a coin shop. "That sounds different," my friend remarked. "Of course it does," I replied. "This is what real money sounds like. What you go around collecting are just slugs."*

* For those of you who weren't born yet, there was a time when dishonest people crafted zinc or other base metals in the size of a silver coin, and used them in vending machines. Those were called slugs. Today, however, the dishonest people who pass off slugs are the U.S. Government.

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$1200/oz today. I think I'll have a nice glass of wine tonight. :P

In preparing for an entry on my blog about gold I ran across articles about the amount of money that hedge funds have put into gold of one kind or another (gold mining, gold etfs, gold futures, etc.). We are talking lots of billions of dollars. I would think that the marginal impact of that investment accounts for a considerable increase of the current price.

That is nice. But, the problem as I see it is that the hedge funds are doing it with an unsound understanding of the economics involved. They could be easily convienced by the government that there is no further threat of price inflation and move their money. The gold price would fall.

If you are in that market and depending upon the price to rise, you had better keep an eye on the hedge funds.

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No no, plenty more reasons. This one was partly due to Chinese buying.

If China decides to hold twice as much gold as it is heading for right now, even spread over 2 years we're looking at 3,000.

C.W., most aren't public domain, but check out Tudor's 3Q letter's appendix (http://www.scribd.com/doc/21753600/Tudor-Third-Quarter-Letter), let me know if this is an unsound way of making the decision! I find most news articles pertaining to finance to be terribly misinformed. The FT in particular is pretty good at providing regular comedy these days. Like the Economist, it "comfortably trails the exact centre of the wake of public opinion", except that in this case it's the market Zeitgeist and opinions swing on a daily basis rather than quarterly (you know what I mean).

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No no, plenty more reasons. This one was partly due to Chinese buying.

If China decides to hold twice as much gold as it is heading for right now, even spread over 2 years we're looking at 3,000.

C.W., most aren't public domain, but check out Tudor's 3Q letter's appendix (http://www.scribd.com/doc/21753600/Tudor-Third-Quarter-Letter), let me know if this is an unsound way of making the decision! I find most news articles pertaining to finance to be terribly misinformed. The FT in particular is pretty good at providing regular comedy these days. Like the Economist, it "comfortably trails the exact centre of the wake of public opinion", except that in this case it's the market Zeitgeist and opinions swing on a daily basis rather than quarterly (you know what I mean).

After an admitted quick search I don't find how much gold China bought in the last year. Do you have a number? One source suggested they haven't bought anything since the low $900s. If that is so then what sectors have pushed gold to over $1200? The Tudor letter says that etf's are the sixth largest holder, which would be like the hedge funds and add some significant volitility problems.

I suspect that even the Chinese central bankers will be hesitant to continue buying as gold gets more and more expensive. I don't think that they want to see those prices until after they have made their purchases.

The Tudor letter appendix certainly offered some interesting stuff. I do get a little uncomfortable when a market analysis gets so technical. There is a tendency to forget that markets are very fluid.

As the letter points out at the beginning, gold is not like anyother market. You have to have a very clear idea as to why you are in it. If you are trying to make profits, especially in the short term, you are in a very risky situation. I have my own ideas how I might approach that market which do not entail trying to guess the direction but just try to take advantage of the volitility without hitting for the fenses. (As I say, they are just ideas and untested.) I think that the risk in the gold market because of the ignorance of the "investor" is larger than the equity market.

If, however, it is pure defense against our government and what it is doing to the dollar that is your motivation, you ignore most of what Tudor has to say and focus on the Fed and the prospects of our government's obligations. Then you look at the willingness of the Fed to create money without accepting that they are doing so (their figures show the money supply going up over 15% in the last year). You look at Obama's willingness to spend. You look at the fact that any interest rate increace is going to put demands on the budget that they are not expecting. You look at Social Security drawing on tax revenue within a few years. You look at Medicare already drawing on tax revenue. You look at their combined drain being much larger than any part of today's federal budget. I think gold plays a big role in your self protection.

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rtg24, am I doing this right? A tonne, or a metric ton is 1000 kilograms or 2.204 lbs. There are 12 Troy oz. in a lb. So a metric ton is 26.448 Troy Oz., at today's price of, say $1200 a Troy oz., is $31,737.60? To sell 400 tonnes yields $12.7 M?

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Use this http://www.onlineconversion.com/weight_all.htm

Also, can't disclose sources, sorry (non public). You can find gold info at www.gold.org but latest info is Sep 09. I suggest making a list of the biggest hedge fund managers (Thiel, Soros, etc.) and finding any recent, leaked letters by them, seeing if anybody has been trading gold recently (I'll let you guess :P). Or, call some traders in your network... see what's up on the grapevine.

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Use this http://www.onlineconversion.com/weight_all.htm

Also, can't disclose sources, sorry (non public). You can find gold info at www.gold.org but latest info is Sep 09. I suggest making a list of the biggest hedge fund managers (Thiel, Soros, etc.) and finding any recent, leaked letters by them, seeing if anybody has been trading gold recently (I'll let you guess :P). Or, call some traders in your network... see what's up on the grapevine.

Well that wasn't the biggest help. :D

How about this, there is a lot of talk about a gold bubble. Every "bubble" that I have read about has a significant level of credit financing. My impression at this point is that there is little borrowed money supporting the gold price. What do you think?

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Will respond post CFA exam tomorrow :P

GOOD LUCK!!

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What's the simplest way to invest in gold, minimizing fees and US taxes? I would like to place dollars in an investment vehicle that tracks a gold index, but don't want to worry about this-and-that tax or fee if I let it sit for a few weeks or a few years. GLD has been mentioned. And of course, I could buy gold directly (jewelry or coins). What are the tax implications for those?

Thanks.

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What's the simplest way to invest in gold, minimizing fees and US taxes? I would like to place dollars in an investment vehicle that tracks a gold index, but don't want to worry about this-and-that tax or fee if I let it sit for a few weeks or a few years. GLD has been mentioned. And of course, I could buy gold directly (jewelry or coins). What are the tax implications for those?
I buy long-term in-the-money call options on GLD, the gold-based exchange traded fund (ETF). Buying options rather than GLD itself gives me great leverage and it is very liquid. I can cash out in seconds. I hold them in a Roth IRA account, so gains are tax-free and I don't have to track my transactions for tax purposes.

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I buy GLD - but I just learned that it has odd tax treatment - it's always taxed at 28% regardless of how long you hold it (insert rant about the Tax Code here). Betsey, why a derivative and not GLD directl? GLD is just as liquid as an option and you don't pay the premiums.

What's the simplest way to invest in gold, minimizing fees and US taxes? I would like to place dollars in an investment vehicle that tracks a gold index, but don't want to worry about this-and-that tax or fee if I let it sit for a few weeks or a few years. GLD has been mentioned. And of course, I could buy gold directly (jewelry or coins). What are the tax implications for those?
I buy long-term in-the-money call options on GLD, the gold-based exchange traded fund (ETF). Buying options rather than GLD itself gives me great leverage and it is very liquid. I can cash out in seconds. I hold them in a Roth IRA account, so gains are tax-free and I don't have to track my transactions for tax purposes.

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I buy GLD - but I just learned that it has odd tax treatment - it's always taxed at 28% regardless of how long you hold it (insert rant about the Tax Code here).

It isn't taxed a single cent if you hold it in a Roth IRA as I do.

Betsy, why a derivative and not GLD directl?

Leverage. I can reap the profits -- or losses -- on 100 shares of GLD without putting down as much cash as buying the shares. I buy in-the-money options because they tend to move just as GLD does. GLD goes up a dollar and so does the option.

GLD is just as liquid as an option and you don't pay the premiums.

The premiums are a non-issue because I buy long-term options to buy and sell, not to keep and exercise. I pay the premium when I buy the option and get it back when I sell the option.

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Betsy, how do you hedge away counterparty risk?

I'm unfamiliar with that terminology. What does that mean?

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Betsy, how do you hedge away counterparty risk?

I'm unfamiliar with that terminology. What does that mean?

There's a certain probability that your "counterparty", i.e. the person with whom you have entered into the derivative contract, won't be able to make good on its promise to deliver the asset to you. This was the case with Lehman, whose assets were frozen after the bankrupcy causing large losses in many hedge funds who relied on Lehman both as a prime broker and as a counterparty. Counterparty risk is often unappreciated - it often was not included in formulae used for calculating CDS prices. Hedging simply means taking action to offset the risk (such as spreading your trades over many banks). There's always a small cost associated with any hedging action, which makes many fund managers ignore it altogether (it helps that they believe to be invincible and smarter than the market).

In your case, it may well be that in a situation that really pushes the price of gold very far up, causing you very large paper profits, the bank will be unable to deliver on its promise to you (perhaps because it has then gone bankrupt, for example if it was holding large amounts of USD-denominated assets). With something like gold, which is your ultimate protective asset, this becomes non negligible. Many people in the alternative investment community are now investing purely in real, physical gold as a result (that and the risk of a liquidity squeeze which I talked about earlier).

Of course, you must then calculate the risk/reward in terms of the probability of your counterparty not making good on its promise, versus the much higher profits your strategy allows you to obtain (including the zero tax) thanks to leverage and the other reasons mentioned above, including limited downside risk (as if your options expire worthless, you're only out of pocket on the premium). In John Paulson's case, he was paying ridiculously low premiums for his option to make a huge amount of money should mortgages fail; but towards the end, he started realizing that if mortgages DID fail, they would take down many banking institutions leaving him with huge paper profits and very little real cash, and he started withdrawing from doing business with the likes of Bear Stearns.

By the way, I find your ability to make money off this strategy highly amusing as it keeps disproving the idiots in various bulge brackets who keep repeating that option markets perfectly price future risks and probabilities and automatically arbitrage away any opportunities for profit. Your profits are theoretically impossible, but then again so was a house price crash :D - as ever, "common sense" and rational thinking about facts trumps sophisticated "what if" spreadsheets.

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Betsy, how do you hedge away counterparty risk?

I'm unfamiliar with that terminology. What does that mean?

There's a certain probability that your "counterparty", i.e. the person with whom you have entered into the derivative contract, won't be able to make good on its promise to deliver the asset to you.

This doesn't apply to way way I trade because I never intend to exercise the options. I buy calls on GLD with the longest expiration date possible. These calls are actively traded so, when I want to sell, I sell them to someone who wants to buy a call on GLD, not the party that wrote the option.

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Betsy, how do you hedge away counterparty risk?

I'm unfamiliar with that terminology. What does that mean?

There's a certain probability that your "counterparty", i.e. the person with whom you have entered into the derivative contract, won't be able to make good on its promise to deliver the asset to you.

This doesn't apply to way way I trade because I never intend to exercise the options. I buy calls on GLD with the longest expiration date possible. These calls are actively traded so, when I want to sell, I sell them to someone who wants to buy a call on GLD, not the party that wrote the option.

Yes, and more importantly, as has been kindly reminded to me by PM, you are trading on an exchange, therefore your trades are centrally cleared, eliminating counterparty risk. I'll keep quiet now :D

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Gold is flirting with $1250 an ounce here in Europe this AM. It's impressive in that it's priced in USD and yet all you hear about is the weakness of the Euro.

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I went into the local souce for gold coin yesterday on my regular "college fund" visit. The gold was sold out. There was not a single gold coin in the store. They sold out on Thursday. I've never seen that before.

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Gold down to $1235 this AM. That volatility is weird to me. I wish I knew better what historical volatility is.

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Gold down to $1235 this AM. That volatility is weird to me. I wish I knew better what historical volatility is.

Since I'm day-trading GLD options, volatility is my friend. When GLD goes up I sell and when it goes down I buy.

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It's fun to revisit this thread at interval. Gold is now above $1,375.

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