3 Ways to Make Precious Metals Print Money

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Precious metals are difficult.

gold and silver investment portfolio

Source: istockphoto.com/Spectral-Design

From an investment standpoint, most investment managers will suggest you put 2% to 3% of your portfolio into precious metals for diversification purposes. The problem with that approach is that precious metals are highly cyclical and volatile, and they don’t have a long-term positive upward bias like equities.

That’s no good for buy-and-hold investors, and instead means that precious metals are much more suited to trading.

Of course, the problem with trading precious metals is the very same cyclicality and volatility they exhibit. The world is struggling economically, so many metals have fallen off a cliff — those considered more commodities than anything (see: copper). However, that also means that gold and silver become more likely to move up.

Given the two, I’d still take trading any day. And right now, a few precious metals are near important technical levels that’ll actually give you a shot at making some money.

Precious Metals Trades: SPDR Gold Trust (ETF) (GLD)

Precious Metals Trades: SPDR Gold Trust (ETF) (GLD)The SPDR Gold Trust (ETF) (GLD) is one of the most commonly traded ETFs. Gold has had a quite a run the past few weeks, and went parabolic, followed by a pullback.

You always have to decide what you personally believe is going to happen next with gold. I think we are in a bear market and the near-term bias is upward. The technicals seem to suggest the same thing.

Thus, your first choice might be to buy GLD and sell covered calls. Thanks to gold’s volatility, you’ll get some good premiums.

GLD is trading around $118.70. The March $119 calls for GLD are selling for about $2.50, which is a 2.1% return for a 22-day holding period, or 35% annualized. That’s 2.4% if GLD is called away.

Likewise, you could sell naked puts. The March 18 $118 puts are selling for about $2.58, which is a 2.2% return for a 22-day holding period, or 37% annualized. (Naturally, if you go this route, you’ll need to make sure you have the funds to cover buying units of GLD if they’re put to you.)

Precious Metals Trades: iShares Silver Trust (ETF) (SLV)

Precious Metals Trades: iShares Silver Trust (ETF) (SLV)The iShares Silver Trust (ETF) (SLV) is the most popular trading mechanism for silver. Silver has been less exciting as far as precious metals go — it has been in a fairly solid trading range for some time — but it may jump on the bandwagon with gold yet.

I think silver is going to move up in the near-term. You have the same options here that you do with gold, but in this case, I would actually use longer-term puts and calls.

SLV is around $14.45. The Mar 18 $14.50 covered calls for SLV are selling for about 36 cents. which is a 2.5% return for a 22-day holding period, or 41% annualized. That gets bumped to 2.8% if SLV is called away.

Likewise, you could sell naked puts. The Mar 18 $14 naked puts are selling for about 45 cents, which is a 3% return for a 22-day holding period, or 50% annualized.

Precious Metals Trades: iPath Bloomberg Copper Subindex Total Return Sub-Index ETN (JJC)

Precious Metals Trades: iPath Bloomberg Copper Subindex Total Return Sub-Index ETN (JJC)I just mentioned that copper is a commodity as opposed to a precious metal, but I want to bring it up because it has been crushed over the past few years and just showed some life this week.

The last time copper traded this low was in 2009, and then it tripled.

I think there is limited downside here. Of course, it certainly could go lower, but I think a lot of risk is priced in. Because of the uncertainty and volatility, you can get great premiums here.

The iPath Bloomberg Copper Subindex Total Return Sub-Index ETN (JJC) is the trading vehicle.

JJC is trading around $23.80. The March 18 $24 covered calls for JJC are selling for about 55 cents, which is a 2.2% return for a 22-day holding period, or 37% annualized. That’s 3.1% if JJC is called away.

Likewise, you could sell naked puts. The March 18th $24 naked puts are selling for about 65 cents, which is a 2.6% return for a 22-day holding period, or 43% annualized.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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