Gold strategy

[Arnold 0]

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

Or maybe gold has not gone up, and the dollar has declined to 35/1375 of it's 1930 value.

[rtg24 0]

Both. USD devaluated, but people are shielding themselves from devaluation (people from high net worth individuals to companies and some governments) by buying assets, gold being the first that comes to mind.

It's supposed to be overbought right now and due a correction, but structurally, even Wall Street, usually not a particularly Austrian (economically) bunch, agrees that it's in a long term trend up.

I tried playing the correction, got burnt, will put on another short on Nov 2 - my instinct is a big tea party victory which would be bearish for gold.

The main reason it is reaching new highs is that the Fed - or rather, Bernanke - is saying more and more Doveish things. A dove is a pro-inflation central banker (aka Keynesian), a hawk one that understands the power of a hard currency. Trichet (a Frenchman, can you believe it?!), the European Central Banker, is refusing to play the competitive devaluation played by all other banks, which is why the EUR is recording all time highs against the USD. The market has priced in about 600 million USD of quantitative easing, which will probably be announced on Nov. 4 after the Federal Open Market Committee meeting.

And yes, that's your money they're diluting away. Inflation is the most powerful stealth tax there is.

[rtg24 0]

Oooh, promising. Bernanke, in the face of the rise in value of assets, is thinking twice about mass-QE, although he is still not admitting that QE1 had zero effect.

Watch this space... and your gold holdings.

[Ed from OC 0]

Oooh, promising. Bernanke, in the face of the rise in value of assets, is thinking twice about mass-QE, although he is still not admitting that QE1 had zero effect.

Watch this space... and your gold holdings.

This right here is the real effect of economic dictatorship (specifically a monetary dictatorship): the biggest investment factor this year is whether the dollar will massively inflate or deflate, which depends on anticipating what Bernanke will do. Note how far more significant that is than the merits of an individual company or the nature of particular markets. Cash or gold is the best investment right now... and the other is one of the worst.

[Brianna 0]

Does anyone here do any trading in silver or other preciuos metals (platinum, palladium)? Or just gold?

[Joss Delage 0]

(...) the biggest investment factor this year is whether the dollar will massively inflate or deflate, which depends on anticipating what Bernanke will do. Note how far more significant that is than the merits of an individual company or the nature of particular markets. Cash or gold is the best investment right now... and the other is one of the worst.

Very good point.

[Joss Delage 0]

It's interesting to see how much gold is fluctuating the last couple weeks or so. Yesterday, its low / high was $1361 / $1385. That's a lot of volatility.

[rtg24 0]

Does anyone here do any trading in silver or other preciuos metals (platinum, palladium)? Or just gold?

I'd say it's a great idea if you have the time to study its balance sheet (i.e. supply/demand issues) and how it moves with gold. Precious metals other than gold usually have strong demand and are fairly hard to obtain, but also do not see as many market actors irrationally pricing the slightest piece of news.

Silver is a weird one, it tends to track gold's movement and amplifies them. I usually incorporate some silver in my gold trades.

Ed - absolutely. It annoys the hell out of us actually (we trade most commodities, several billion USD's worth a year) because it affects the price of everything and everybody has had to read into left wing economics to try and understand what the hell Bernanke and the Japanese are thinking. I am surprised the Fed doesn't figure more prominently in most discussions in Objectivist circles, since its policy directly affects the most Americans (more so than even the "free" healthcare idiocy).

Central bankers affect hundreds of millions of lives for decades and yet nobody knows who they are. Who's the Japanese central banker? Who runs the New York Fed? The Dallas one? The Chicago one? How many Feds are there? What are the checks on Bernanke? Why is he considered a nice guy? Ayn Rand knew well that understanding economics was central to understanding freedom, and she also knew well that most academic economics was, to quote a friend, "intellectual masturbation" - that simple concepts are sufficient to run a country properly. The decent people in the US will go to the streets over a proposal to nationalize insurance, but blissfully ignore the fact that the US govt is taxing them stealthily by steadily destroying its own currency to pay for expensive idiocies (I guess you can attack the demand side, the nationalized healthcare and insurance, or the supply side, the money printing that makes it affordable by screwing savers and workers).

I strongly believe any politician ought to have at least 20 years' experience - professional, not academic - in the field they want to "run". Academics are destroying everything from economics to politics.

Oh, how I miss Jefferson's representative republic...

[rtg24 0]

It's interesting to see how much gold is fluctuating the last couple weeks or so. Yesterday, its low / high was $1361 / $1385. That's a lot of volatility.

Look at market volume for clues.

One theory is that people have levels at which they set up stop losses or limits to take profits (yesterday's was supposed to be profit taking). Once that level is reached, whether on the cash (physical, spot) market or in futures, they sell/buy. So you see a flurry of activity, and large price swings. Then it's back to the usual low volume, steadily increasing bids.

[Ed from OC 0]

I mentioned before the inflation vs deflation decision I was struggling with.

The argument for deflation (see Prechter or Dent) is largely demographic, with the retiring baby boomers moving from their peak earning years to consuming their savings in retirement. As was pointed out to me today, this assumes the behavior of the retirees will not change. Just as people adjust their behavior to high or low tax rates, if a massive wave of retirees causes the economic collapse of this country to accelerate, then the boomers will not remain passive dependents; they will go back to work, making at least enough money to get by. This would effectively counter the large-scale deflation which would otherwise occur.

The past couple years have seen the dollar cycle up and down, with commodity, stock market, and housing prices rising and falling through short periods of modest inflation and deflation. Yet the biggest causal mechanism I see is the Fed increasing the money supply. "Quantitative Easing" is a euphemism for monetizing the debt. Round 2 has not started yet but already gold has shot up just in anticipation. I expect to see many more rounds of this.

Some say the amount of credit and debt out there is too massive for the Fed to handle by inflating the dollar to maintain stable prices. I disagree. Zimbabwe shows the perfect example of an unlimited ability to inflate currency.

Another argument for deflation is the inevitable bust to follow each credit boom. Well, under Greenspan and Bernanke, each bust was mitigated by kicking the can down the road, by trying to use more debt to solve the problem of too much debt, compounding the problem. Certainly some assets fell (tech bubble) and others have fallen part way (housing) but the drop in prices can be stopped with enough paper money thrown at it. Hence QE1, QE2.

So, the government is actively dissuading people from saving cash. They are encouraging people to borrow, borrow, and borrow some more. I expect to see massive inflation over the next several years. It will kill the accumulated savings of retirees just as the boomers are leaving the workforce. Also, without the ability to use one's savings, the ability to invest capital and launch new companies (or expand existing ones) will be curtailed, keeping unemployment high.

So I say: load up on assets to hedge against inflation. Buy gold, gold mining companies. If you think the US will inflate faster than other countries, invest overseas. Buy assets today rather than tomorrow. (Of course, please do your own homework on your investments before taking action.)

As an aside: Note a particularly scary aspect: the Fed is buying corporate bonds. This is a backdoor approach to the government gaining ownership of private enterprise -- i.e., it is a backdoor to establishing not socialism but fascism. In another thread I mentioned the threat of nationalization of 401ks. If that occurs, we would have the stocks, bonds, and cash we own in those accounts confiscated in exchange for government bonds -- IOUs backed by nothing but the tax code. What this gives the government, through the accumulation of shares, would be majority ownership of most of the public companies in the USA.

This is bad and going to get worse. I wish there was a way to step aside and avoid getting hit with this monsoon but I don't see how. So, I will buttress my finances as best I can to weather the storm.

My two cents for the evening.

[Arnold 0]

This is bad and going to get worse. I wish there was a way to step aside and avoid getting hit with this monsoon but I don't see how. So, I will buttress my finances as best I can to weather the storm.

No one can predict a future that is dependent on volitional actions. The best way to protect yourself is to keep your affairs in order. Get rid of debt if you can, and make your lifestyle an affordable one. Many come to grief because they over extend themselves rather than living modestly. In short; Better to own a Chevrolet than owe on a Porche. The graeatest feeling of wealth comes from knowing that no one owns you because you owe them.

[Joss Delage 0]

Get rid of debt if you can...

I completely disagree. If you have access to a low rate borrowing vehicle, and you think inflation is coming, you should accumulate as much debt as possible, and invest your excess cash in gold, foreign stocks, and the like.

My credit card charges 8%-to-9% a year, and I did much better carrying debt close to my max level, than I would have had I sold gold to pay it off.

[Joss Delage 0]

Well, China raises its rates and gold falls $30 (>2%)... USD is up. Go figure.

[jordanz 0]

I know there are other GLD investors here. I've long thought that Gold is headed to $2000 or higher. But, I smell a possible correction in the short term. Anyone else concur?

[Betsy Speicher 0]

I know there are other GLD investors here. I've long thought that Gold is headed to $2000 or higher. But, I smell a possible correction in the short term. Anyone else concur?

I day trade GLD options, but I don't try to time the market.

I know the long-term trend is up because the strongest currency in the world, the dollar, is being inflated. My strategy is to maintain a fixed percentage of my assets in long-term, in-the-money calls that are leveraged about 10 to 1 with GLD itself.

When GLD goes up, the value of my calls exceed my target percentage, so I sell enough to bring the percentage down. When GLD goes down, the value of my calls falls below my target percentage, so I buy enough to bring the percentage up to my target. The result is that I take profits when GLD is up and buy when GLD is down. Works for me.

[rtg24 0]

Betsy, have you ever run a few backtests to check that this is the most efficient way to be long? In the long run, being long optionality loses money, bar extraordinary events (due to theta decay). Yesterday implied vol on 3m CME gold was about 38%, which I guess is a bit below the 50% or so appreciation we have seen this year.

[ewv 0]

Betsy, have you ever run a few backtests to check that this is the most efficient way to be long? In the long run, being long optionality loses money, bar extraordinary events (due to theta decay). Yesterday implied vol on 3m CME gold was about 38%, which I guess is a bit below the 50% or so appreciation we have seen this year.

The strategy loses in general, or more specifically for a commodity biased by increases in monetary inflation for periods when the assumption of higher inflation is true?

[Betsy Speicher 0]

Betsy, have you ever run a few backtests to check that this is the most efficient way to be long? In the long run, being long optionality loses money, bar extraordinary events (due to theta decay). Yesterday implied vol on 3m CME gold was about 38%, which I guess is a bit below the 50% or so appreciation we have seen this year.

I don't do the kind of technical analysis you do, but I have been "testing" my ideas with my own money for decades and doing very well. I have been in gold since September of 2008 and heavily into gold options for the past two years.

Generally, buying options is a losing strategy which is why I have usually sold options -- covered calls -- to increase my investment income. The current situation, however, is an exception. Buying and selling long-term in-the-money calls, which I have no intention of ever exercising, is a way of leveraging my position in a commodity I know will increase in price. I have been making out very, very well.

I don't know if this is the "most efficient" way to be long, but it suits my purposes. There is a ready market in GLD options, so I can make quick entrances and exits as conditions warrant. Most important, I can hold and trade my options in a Roth IRA which makes my profits totally tax-free.

[ewv 0]

Betsy, have you ever run a few backtests to check that this is the most efficient way to be long? In the long run, being long optionality loses money, bar extraordinary events (due to theta decay). Yesterday implied vol on 3m CME gold was about 38%, which I guess is a bit below the 50% or so appreciation we have seen this year.

I don't do the kind of technical analysis you do, but I have been "testing" my ideas with my own money for decades and doing very well. I have been in gold since September of 2008 and heavily into gold options for the past two years.

I think by "backtests" he means have you tested your strategy against the historical record, looking for different kinds of patterns that might result in different effects? You would look to see what would have happened with your investment if you had been following your rules then. Three years (since 2008) isn't much of time record to go by.

[rtg24 0]

The thing about options is that they are a way of trading volatility not just direction. It is important to take into account what volatility is priced in when you trade the option. So, why is this important? Well, if you are certain gold will go up over time, buying a put with an implied yearly volatility of 10% might be cheap if the underlying (gold) goes up 30-40% a year (which is about what it has been doing). However, if the market prices in a volatility of 37% ATM (remember the smile means higher vol if picking up OTM or ITM than ATM) you are effectively "paying" 7% of theta to the market vs. holding the position. Implied vol is a yearly thing so it means the underlying will move 37% in one year.

That's why I suggest a backtest. It's quite hard to get hold of options data for free (hell, it's a pain even with the Bloomberg excel add-in). But you have a history of what you have paid for the things. One quick test would be to say "how much did I pay in premium on day X" and "take" the equivalent futures or forward position (in delta, or just go "long" the same amount that you paid in premium). Then you compare your compounded returns.

Trading volatility on the long side can be extremely profitable during large tectonic shifts in expectations, which are often not priced in (NB: on the whole "black swan" thing: 1. none of Taleb's events are black swans, all are predictable and expected, e.g. the Japanese earthquake was a "big one" expected by the locals for decades 2. since 1987, the shape of the vol curve has started "smiling", that is you pay more for out of the money and deep in the money protection in effect to make up for the kurtosis in the distribution of returns). I am no longer sure that is the case with gold. E.g. let's say I went long yesterday a 2000 3 month call on a Globex future. It would cost me 52 bucks per oz. Now I wait my three months, and lo and behold as expected the price is at 2040. So I have the right to buy gold at 2000/oz from the option seller. Except buying this right cost me 52 bucks so I'm now 12 bucks out of the money. Now of course, if it's 2006 and the bank gives you an implied vol of 10% on your 600/oz gold you will make a lot of money. But markets adapt and free lunches don't stick around. Most people are coming to the view that gold is quite a good investment and this is driving implied vol higher.

[rtg24 0]

I will add Betsy that I admire your fortitude and courage with that investment strategy. For sure I wouldn't have had the same courage and would have exited at 1000 at most. Most of my friends got out at 900 thinking the thing was just insane. A few went in at 1200 or so and stuck it out til 1600. For you to continue with your strategy year in year out is really impressive - discipline is, ultimately, what makes or breaks any trader.

[rtg24 0]

Most important, I can hold and trade my options in a Roth IRA which makes my profits totally tax-free.

That is an extremely important consideration indeed. The entire city of Geneva is based on the premise of tax evasion, sorry, minimizing. This is why private banks here offered rates of at most 4% even during the boom years - because on the other side of the equation you kept so much more of your investments it more than made up for the way lower yields.

I see it purely from the point of view of absolute return because I trade for a company; trading for your personal account - at least in the US (tax rates here in Switzerland are so low one can ignore them) - is as much about tax efficiency as it is about returns, from the little I have read on the subject.

[L-C 0]

The parts of this that I do understand, I find interesting. But then there's GLD, in-the-money, (implied) volatility, theta, long etc. Is there a good and reliable resource to learn from for (almost) total novices like me? Other than trudging through it all via googling and Wiki.

Most people here don't seem to deal in investments other than a small amount of stock and dwelling-hopping. I suspect the shape and level of the income curve has something to do with it, and obviously the high taxes do their part as well. Even doctors and the like seem to mostly just sit on a house and a savings account. None of this is ever close to being touched on in school unless you specifically major in economy in college.

[jordanz 0]

FYI - in addition to GLD, I'm now holding EUO and SH.

[rtg24 0]

The parts of this that I do understand, I find interesting. But then there's GLD, in-the-money, (implied) volatility, theta, long etc. Is there a good and reliable resource to learn from for (almost) total novices like me? Other than trudging through it all via googling and Wiki.

Most people here don't seem to deal in investments other than a small amount of stock and dwelling-hopping. I suspect the shape and level of the income curve has something to do with it, and obviously the high taxes do their part as well. Even doctors and the like seem to mostly just sit on a house and a savings account. None of this is ever close to being touched on in school unless you specifically major in economy in college.

Most of these things you can Google and get sufficient understanding of. If you wish to learn how to trade options (beyond the most basic strategy) you need to read these two books cover to cover:

http://www.amazon.com/Options-Futures-Othe...762&sr=1-11

http://www.amazon.com/Dynamic-Hedging-Mana...3824&sr=1-1

(you can find cheaper versions of both if you look around)

This will be a good starting point. You can then start digging in various directions and see what you find. Every trader has his edge. Takes on average 3 years to develop, so be patient.