Gold Holders: How to Protect Yourself

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". . . keep buying bullion coins regardless the price. But if you can't—if your only options are ETFs and mining shares—it's time to do a little hedging."

A successful ignition of equities will send gold and gold shares to the dustbin. Not because gold and gold shares are worthless investments, on the contrary: because they are the safest harbor to pull into when seas are raging. If investors perceive the storm has passed, they'll pull up anchor and set sail for the most exotic shores they can find. This is a risk-ready crew a'waiting, and they're fixing for equity island.

So what to do for those of us who are genuine gold-philes and believe in the long-term prospects of the shiny yellow stuff? For starters, keep buying bullion coins regardless the price. But if you can't—if your only options are ETFs and mining shares—it's time to do a little hedging.

Despite the rise in bullion, gold shares, too, have been weak. We can argue whether the HUI is truly representative of gold shares, whether the XAU is a better proxy, or GDX, or the Toronto Stock Exchange's XGD – but why bother. The shares have failed to keep pace with bullion. That means gold is losing steam. It means that gold shares, which are supposed to be leveraged to the gold price, don't believe the current rally in bullion. Let the numbers prove me wrong.

That being the case, gold holders need protection, and it can be gotten in a number of ways.
  • First, by selling calls against your current mining shares. If you're not going to sell at this point, it makes sense to collect some income off the buggers as they fall—reduce your purchase cost, as well. And if we're wrong and the shares rise, you'll still profit when your shares are called. Go out to April and sell roughly 10% out of the money calls.
  • Or:
  • Sell the bullion and buy the miners—a sort of arbitrage that sees a profit as the gap between the two closes. Buy puts on GLD and calls on GDX. Get the longest dates you can find.
  • Or:
  • Just buy some calls on the Proshares UltraShort Gold ETF (GLL). That should offer you some rather inexpensive ultra-leveraged insurance on gold shares dropping.
All in all, we're for gold. It's the only real money out there. But in the meantime, we're against dead money.

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