Investing in Gold
Investing in Gold: Cash In on Gold's Velocity 12-24 Times Over the Next 12 Months
Special Update to Gold Price: Don't Just Buy Gold, Buy Gold's Motion
A Taipan Financial News Research Report
by By Adam Lass, Senior Market Analyst, WaveStrength Options Weekly
March 7, 2007
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Last week, I noted that there was far more opportunity playing gold's relative motion then its ostensible value. The past few days have offered a perfect illustration of my point.
Keep in mind that I sat to type my missive on February 28. The former head of the most important bank in the world had warned of a significant risk of recession, global markets were in chaos, and here in the U.S., we had just witnessed the most formidable single-day correction since September 11, 2001.
We are talking about the sort of situation that gold bugs dream about, when the price of the precious metal that so many claim to be the ultimate safe haven (and by extension, the companies that mine it) should have been climbing like a cat chased by a pack of maddened hounds.
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Investing in Gold: XAU falls with the Dow
But the reality was nothing like the fantasy. The Philadelphia Gold And Silver Index (XAU: PHLX) had been climbing almost nonstop for most of 2007, gaining $19 and almost 15% between January 10 and February 26.
On February 27, the XAU gapped down four points at the open and never looked back. Instead of lining gold owners’ pockets, the index robbed their wallets some 13% in four straight trading days.
Not only was this loss predictable, it was an opportunity to make significant gains. Specifically, I warned that this drop was part of a regular cycle within the XAU’s trading pattern, and recommended that readers purchase either XAU May 137.50 puts (SWO QH) or June 135 puts (XAV RG).
Investing in Gold: Now the XAU will rebound
The May contracts were available on March 1 for $7.70, and are currently trading for $11.80, a gain of 53.25%. The June contract has also climbed appreciably, gaining some 58.33% over the past few days.
If you chose to hedge this latter contract with eight shares of the XAU, then you lost some $32, compared to a cash gain on your options of $420. And if you are indeed still a gold bug, than you have eight more shares to put in your hope chest.
In fact, I have some good news and better: those shares are in all likelihood about to gain back all of that loss and then some, because within the next three trading days, the XAU will commence its next cyclic upstroke, probably rising back to the top of its recent trading range at/or 144.77 and possibly moving back to its recent high of 148.09.
Investing in Gold: How to get on board the next cycle
Please understand that I mean this to be both a tutorial and a recommendation, so if these prices (which admittedly move quite quickly) are not spot on by the time you receive this, you should still be equipped to make gains of this move.
Begin by setting aside your XAU shares for now (you can sell them at the top of the next rise, or use them again as a hedge come the next downstroke, or simply hold long-term against the indexes steady annual gain). Then sell your XAU puts immediately for gains. Now it is time to search out the perfect call contract for riding the upstroke.
I begin by selecting an option series with more than 30 days to run, as I absolutely despise watching time decay ruin an otherwise sound play. Right now that means Mays.
Next, I look to see what is at or just in the money. That is to say that the call option’s strike price should either match or come just above or below the XAU’s current price of 132.14. In this case the XAU May 132.50 suits the bill well.
Next we check the delta, the figure that describes how the contract ought to move in relation to the XAU. In this case, we are looking at a delta of 0.42, so we can presume that a $12 rise in the XAU will add $5.04 to these calls, offering traders a gain of 56%.
Slick traders might choose to protect this play with either cheap puts or by short selling XAU shares. Both these tactics are unnecessarily complex. Instead, I suggest simply keeping a 30% trailing stop on your own books, and moving it up as they gain in value to assure that you lock in all gains.
Again, let me point out that this methodology of cashing in on this asset’s regular clocklike motion can be deployed anywhere from 12 to 24 times a year for reliable gains of between 20% and 70% per effort, and with relatively little risk.
Investing in Gold: Related News
Original Gold Price report by Adam Lass, "Gold Price: Don't Just Buy Gold, Buy Gold's Motion":
http://www.taipanfinancialnews.com/goldprice0307.html
Technically-driven options trading:
http://www.taipanfinancialnews.com/wavestrength/
Gold futures:
http://www.nymex.com/index.aspx
The Philadelphia Gold and Silver Index (XAU):
http://www.phlx.com/products/currency/currency.html
More information on trading XAU Options:
http://www.cboe.com/
Diversify, seek higher yields, and safely invest in the Gold market from EverBank:
http://www.everbank.com/main.asp?affid=eb&idpage=pro_mscd&referID=12250
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