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« Yamana Gold Incorporated A Future Options Play | Main | The Gold Storage Solution: Switzerland »

A Strategy to Protect Your Portfolio

HUI Chart 19 June 2009.JPG

With the HUI having risen from 280 to the 400 level at the beginning of June 2009 we took the view that it was time to take some action that would protect our portfolio. Gold was at $980/oz and the US Dollar was looking extremely oversold with the possibility of a bounce on the cards.

So there are a number of possible strategies that could be utilized such as sitting through a possible downturn in the HUI, taking some profits by selling a few shares across the board etc. Some cash on the side lines is always useful to enable us to take advantage of any dips that may present themselves. However we are in a precious metals bull market and both gold and silver could take off at any time and settle at much higher levels so there is the risk of not being in the market and missing out on those gains. So we examined our portfolio and found that one particular gold producer had been a star performer for us in that it had gained 82.44% in less then a year.

Further examination of this stock revealed that it was it was way ahead of the pack in that there was a yawning gap between the stock price and its 200dma, an aberration that we believe would rectify itself sooner or later. The stock had a relative strength reading of over '70' which suggests that it has gone as far it is going in the short term and its P/E ratio was well above 100, again a far higher reading than many other comparable stocks.

So we made the decision to sell our entire holdings of this stock and lock in the profits and weather the storm with the remainder of the portfolio. Having done that we decided that to utilize the cash with the purchase of PUT options on the very same stock with an expiry date of September 2009. September was chosen in order to allow enough time for this stock to pullback in response to a mini dollar rally and gold prices losing some ground.

The PUT contracts have now improved by 56.90% so this gain has helped to soften the losses registered by the other stocks. A similar strategy could also be applied to the silver sector when you see a similar situation developing it could be worth your while to give it some thought. It is a difficult call for us to make being gold bugs and placing a down bet in a bull market but as they say nothing goes up in a straight line and sometimes its a risk worth taking. If the gold market had continued to rise then this options trade would have lost money.

We can see from the chart below that the USD changed direction at the beginning of June when the technical indicators, particularly the RSI were suggesting that it was oversold.

usd chart 19 jun 09.JPG

The chart at the top of the page depicts the HUI peaking at the same time as the USD bottomed. Also note that the technical indicators were at the top of their respective ranges suggesting that stocks were overbought.

The movement that followed again suggests that the US Dollar and gold are still inversely correlated, however the time is coming when gold will move higher regardless of the dollars behaviour.

If this sort of thinking interests you then please drop by and take a look at our site where access to our portfolio is free, our newsletter is free and we publish every trade that we make. We also post our thoughts and analysis leading up to making a purchase or a disposal hopefully allowing our readership the time to understand what we are doing and why and also to make the necessary preparations to make the trade.

Got a comment – then fire it in.

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Reader Comments (5)

I like you guys, because we think alike in terms of strategy and timing. Uncannily so. It's like having another set of eyes looking at the market and spotting things I might have otherwise missed.

The fact that you do a lot of work and your service is free helps too!

Looks as if the clownbuck has burned off a lot of the oversold condition and is coming face to face with another moment of truth here soon. Odds pretty clearly favor another leg down I think unless there's another scramble for cash driven by another deleveraging episode. But then again, things have changed since last fall, haven't they?

The peachback doesn't look doesn't look quite as attractive as a safe haven anymore. The need for bucks to pay off debt may still be there and that's a big driver, but the allure of bucks as a risk free parking place may have waned considerably. Gold may steal some market share there, especially when it's pretty obvious that any downward swoon in the economy or collapse in our financial paper shuffling empire will simply spur more agressive fiscal and monetary "stimulus." And away goes value down the drain.

For what it's worth, I've been trading the technicals, and have been lucky enough to catch a decent part of every upmove during this long consolidation. And I've been willing to be uncharacteristically very light on my mining stock position whenever the technicals aren't in very favorable alignment during this long consolidation. That's changing.

I know it's summer and I may be early. I'm also not seeing the negative extremes I like to see on the MACD and RSI, but I'm staring to average in starting today and Monday and will be loading up into strength. I just have the intuitive sense that we've done our time consolidating that huge up move from summer 06 to early 08and we have a good shot at an upside breakout here soon. Time to start putting the chips back on the table.

As always, I could be wrong, but I use options to hedge risk and this seems a fairy low risk entry point somewhere right in around here.

And the reward might be big. After one of these grinding sideways affairs, people tend to forget gold and silver's potential to go parabolic virtually overnight. It's worth taking some risk to try to catch a ride on one of those rockets.

Thanks for what you do fellas!


June 19, 2009 | Unregistered CommenterTom

Recently, you published comments about potetntial trades in options that you were following. I was wondering if you have or are willing to publish a list of your winners and losers, to date, in this regard?
Obviously, Rangold is winner and your reasoning process for conducting this trade is sound.
Also, is there a cost to join your options trading area for future picks?
Thanks kindly,

June 19, 2009 | Unregistered CommenterMark

As per Tom I really appreciate your newsletters too. I have been around gold for ten years but only the last 6 months as an investor (stocks, bullion). Even though I am from Australia I have learnt a lot from reading your material and hope you keep it up. Thanks fellas.

June 20, 2009 | Unregistered CommenterLachlan


No we do not have a list of all the options trades that we have made across the board, however it is a good idea and we will try and find some time to pull it together. Dont hold your breath though we are busy at the mo, but we will get to it.

June 21, 2009 | Unregistered CommenterGold Prices

While I do not "option trade," I enjoy your commentaries on gold and silver stocks. Thank you for your service to the community!

June 22, 2009 | Unregistered CommenterDiana

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