Gold has taken a backseat in the past few months. What looked like a promising rally for the precious metal earlier in 2016 has fizzled under the pressure of a rising U.S. dollar and the prospects for higher interest rates from the Federal Reserve. In fact, the SPDR Gold Trust (ETF) (NYSEARCA:GLD) has fallen nearly 14% since July due to rising pressure for these very market forces.
With gold beaten down, and GLD testing technical support, investors might be tempted to take a bearish stance on the precious metal. But now is not the time to sell your gold holdings or even to short the GLD ETF. Now is the time to go long and buy.
Why? There are several reasons to buck the prevailing market winds when it comes to gold. For one, the recent issues in Italy and trouble in the eurozone make a strong case for gold as a hedge against market trouble. You might also consider that Russia is buying gold hand over fist lately.
Additionally, India is devaluing its currency and moving away from cash — a development that can only be bullish for gold demand in one of the fastest growing economies in the world. There is also the very real problem of rising inflation — against which gold is an excellent hedge.
Ideally, investors would want to hold some exposure to gold in their portfolio regardless of these global market forces, if for no other reason than as a contrarian hedge against the bullish crowd. The problem for most of us, however, is that we don’t have vaults in which to store gold holdings.
This is where the GLD ETF and gold mining ETFs, such as the Direxion Daily Gold Miners Bull 3X ETF (NYSEARCA:NUGT) and the Direxion Daily Jr Gld Mnrs Bull 3X ETF (NYSEARCA:JNUG) come in. These ETFs allow investment exposure to gold without leasing a vault in which to store piles of the precious metal. (Though if you are looking for gold storage, even offshore gold storage, you have options.)
Click to Enlarge The safest and most conventional route for investing in a rebound in gold prices is to just buy shares in the GLD ETF. GLD is currently trading in oversold territory, and has plenty of room to run before it hits technical resistance at its 50-day moving average, making now a prime opportunity to jump into a long position.
However, if you are listening to the doom and gloom on gold in the financial media, the prospect of diving headfirst into a long GLD position probably makes you understandably quite nervous. While fallout from Italy’s recent vote and trouble in the eurozone could certainly factor in.
Is gold really near a bottom here? Could the Fed’s rate hike boost the dollar and scuttle support for GLD?
These are valid concerns. The answer (if you’re going long on gold via the GLD) is in the options market.
2 Trades for the GLD ETF
Married Put: By using a strategy called a “married put,” traders can utilize options as an insurance policy when opening up a new position. To initiate this position, the trader purchases a single front-month, at-the-money or out-of-the-money GLD put for every 100 shares of the Gold ETF purchased.
The strike of the purchased put should reflect your risk tolerance — i.e., an at-the-money Dec $111.50 put offers full protection, with losses limited to the cost of the put and brokerage fees, while an out-of-the-money Dec $110 put would allow for GLD to test support before the insurance kicked in.
With market volatility being what it is, the GLD Dec $110 married put may be the way to go. In this trade you would buy 100 GLD shares (currently trading for roughly $111.54) while simultaneously purchasing one Dec $110 put, which at last check, went for 90 cents, or $90 per contract.
In the end, the total cost for your option position would be $90, while the stock position would total $11,154 — excluding brokerage fees. If GLD closes below $110 when December options expire, you would be able to exit the position and avoid any additional losses by exercising the Dec $110 put. Finally, if GLD holds above $110 through December expiration, you can roll the $110 put forward into January if you feel you still need the protection.
Put Sell: While I typically recommend put sell positions as a way to capture premium on a stock that is likely to hold above support, you can also use these options as a way to essentially name your price on a stock or ETF you wish to own. Let’s say you want to buy, but believe the Fed’s rate decision will help push GLD to the $105 area before the gold market rebounds on bargain hunting. Thus, $105 is your target price for owning shares in the GLD ETF.
To essentially set that price, you could sell the Dec $105 put, which was last bid at 17 cents, or $17 per contract. Selling this put immediately nets you a premium of $17 per contract and the obligation to buy GLD at $105 per share if the ETF trades at or below your target.
If GLD doesn’t trade below $105, you still keep the premium and can roll your target out to the next contract month and try again. The downside here is that if GLD never hits your target, you never own the shares at the price you want to pay.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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