Analysis of the USD, Gold and the HUI shows us that the inverse relationship between the USD and gold remains intact and that the relationship between gold and the producing stocks also remains in place. We can also glean some rough ratios from these relationships, for instance, the USD is up 6.7% compared with gold which is down 11.4% and the HUI which is down 24%, since hitting their December 2009 highs.
So in terms of leverage we have the USD:Gold at 1:2 and Gold:HUI at 1:2 making the USD:HUI at a ratio of 1:4. This only applies to the time period that we are observing and it should be remembered that these ratios can produce various aberrations depending on a number of outside influences. For instance we have George Soros talking about gold being a bubble which no doubt influenced a number of investors last week.
However if you are an active trader or have in your financial armory the funds to allocate to the occasional trade with a little more spice than your core position offers then these ratios have a use. To go a step further and introduce options trading where contracts can double or half in a short time and we have the ingredients to get your adrenalin pumping.
Taking a look at the above chart we can see that gold is not only in a bull market but also that its progress has been of a volatile nature. The gains are eked out one step at a time and the losses come in the form of severe pull backs rattling the nerves of most investors. Those of us who have been in this tiny space for some time have seen our holdings of precious metals return a handsome profit. The associated quality stocks have also done very well and they usually deliver leveraged gains to the metals. If you stand back and take a look at the charts of your favourite mid caps you will see that even they have mostly been through a roller coaster ride of late, again offering nimble traders the opportunity to rack up some decent profits.
A number of our subscribers have portfolios that wear two hats, one is their core position which they do not trade as they are in this sector of the market for the long term. The other is their trading hat whereby they have allocated a portion of their portfolio for the taking of larger risks in order to reap greater rewards. However, we live in a world of instant everything, coffee, action replays and “if I buy ABC Limited how much will it be up by the end of the day” you get the drift.
One such vehicle which can be used to satisfy the needs of the active trader is the use of Options, where a small deposit can give the trader control over a number of stocks or their favourite commodity and return a reasonable profit over a relatively short time period. Options expire at a given time in the future so it is essential to lock in profits by taking money off the table or using the 'stop' facility should the value start to erode. For instance if gold moves 2% in either direction, a stock could move 4% and a well placed option could move 40%. Its an exciting experience when you close a winning trade, you feel like a genius, however, when you are positioned on the wrong side of the move the bloody nose hurts. So go gently when you venture into the options playground and ensure that your exposure is small no matter how good you think the trade is or who told you it is a sure fire winner – theres no such thing.
On our web site www.gold-prices.biz we have had many requests to provide such a service usually from subscribers looking to add some extra zip to their trading activity. So we launched a new letter called OPTIONTRADER where we have closed our last 7 trades for an average gain of 51.17% in an average time of 37 days per trade. Feel free to drop in and take a peek it may be just what you are looking for in terms of leverage on your trading activity.
All the best.
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