I am not a gold bug but I can sense there is a growing number of traders and investors in the market who are wrongly fearful of inflation. There is no inflation if you include asset prices like houses into the mix. We are, in fact, in the middle of a savage bout of wealth-destroying deflation.
All that money supposedly created by the Fed (which does not create money, the Treasury Department does) is not circulating; it is sitting back at the Fed on deposit by the banks. Ditto for the more than one trillion dollars created since December by the European Central Bank (ECB). When money does not circulate, the money supply is not increasing.
We are, after all, in the 21st century, and in this stock market, traders remain fearful, making the gold trade a good one for several years. And these fears will be stoked as the Fed and the ECB create more liquidity to combat the impending slowdown in the U.S. (likely to start this summer) and the recession already underway in Europe.
How can you play the gold fear trade and generate regular weekly income?
If you own the most widely held ETF for gold, the SPDR Gold Shares Trust (NYSE:GLD), it’s a great holding to sell covered calls against. If your cost basis on the GLD is at $160 or below, you should consider selling the March Week-4 161-strike calls, generating $1.10 per contract or $110 in cash in just a couple of days. You can even consider the GLD March Week-4 162-strike calls, which are going for 62 cents a contract.
Plan to sell calls on the GLD every week and you can turn that 0.7% weekly gain into 36% over the year.
Or, if you don’t already own the ETF, look at selling the GLD March Week-4 160-strike put options, where you will get around 46 cents per contract, or $46.00.
If you do this all year long, using slightly out-of-the-money puts, that’s a 15% annual return using the same trade every week. And if the GLD dips, you can roll the position to a later expiration and/or a lower strike to avoid being put the stock; this action will generate more cash. Alternatively, you can agree to purchase ETF and then sell calls against it.
There are many variations of this trade but if you own gold and are not using your position to generate income like this, you are potentially foregoing extra cash in your pocket every week or month.
For purposes of disclosure, Michael Shulman does own shares of the GLD.