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« Agnico-Eagle Mines Limited Options Update | Main | Kinross Gold Corporation: Reserves now stand at 51 million ounces »

Leverage: Its Your Option

USD Chart 31 January 2010.JPG
USD Chart

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.

Gold Chart 31 January 2010.JPG
Gold Chart

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.

HUI Chart 31 January 2010.JPG
HUI Chart

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 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.

Got a comment then please add it to this article, all opinions are welcome and appreciated.

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Reader Comments (9)

The USD is going to 85 from here before we can talk about overbought, and i hope this time George will be right this time. I am adding to my gold shorts tomorrow.

February 1, 2010 | Unregistered CommenterDi

Good article on the the US$/Gold inverse relation and Options trading...One suggestion to add for new Options traders that I have implemented and it works, is to paper trade for at least 3-6 months, in a selected stock(s), prior to using your real money. This will protect you from being too aggressive and wreckless, it also gives you a feeling for the movement of the stock (which is very important). Also, use the charts and Fibonacci numbers - to project where a stock may go - either up or down.

With news out this morning on the US deficit/debt problems, I would be very hesitant about the US$ this mini-rally, I see it topping around 81.
I won't fight the trend or the Fed's policy of 1)historically low rates coupled with, 2) the injection of record amounts of fiat US$ into the system, to re-inflate and keep the US economy going.
Time will of luck on all trades!

February 1, 2010 | Unregistered CommenterMark

Di, thanks for the good kharma...we're all having a good laugh on that one!

February 1, 2010 | Unregistered CommenterSnakeman


Do go gently with your plans, its usually dangerous to go short in a bull market even if George thinks we are in a bubble. He is far richer than we will ever be but on this ocasion we are of the opinion that gold is not in a bubble, as you well know. Pls let us know how it works out for you as we are always interested in differing views to ours, it helps to police us.

Thanks, Bob K

February 1, 2010 | Unregistered CommenterGold Prices


Good comments, especially getting to know your stocks and gaining a feel for their behaviour in particular situations, one of the reasons that we only focus on a few stocks, to have 200 or so would send us round the bend as we would forget why we had bought them in the first place.

February 1, 2010 | Unregistered CommenterGold Prices


I think that you have left the door open to the reptile cage.............

February 1, 2010 | Unregistered CommenterGold Prices

with the best daily gain in spot price in 3 months, must have misunderstood me, sorry about that...Di just jinked his/herself with that talk of shorting...

February 1, 2010 | Unregistered CommenterSnakeman

Gold Prices,
Good point...limit the number of stocks/sectors of interest to just a few, therefore you, as an investor, can literally become the expert on a stock's option and hopefully do well.

February 1, 2010 | Unregistered CommenterMark

Why Soros is Probably Buying Gold Now

Peter Cooper

Given the moves into gold by rival hedge fund managers like John Paulson, it would be surprising if living trading legend George Soros is not buying the yellow metal at the moment. Indeed, investors should always buy when this man hints he might be selling. His comments at the World Economic Forum in Davos seem like classic trader double-speak. What does Soros mean when he says gold is the ‘ultimate bubble’ asset class? Newspapers like the Daily Telegraph fell for his ruse, immediately predicting a massive tumble for the precious metal. Yet Soros merely pointed out what even the most ardent gold bug would concede: that if you study the history of financial crises, you know that the credit-induced asset price inflation moves from one asset class to another until it reaches gold as the ‘ultimate bubble,’ or the last of the bubbles. Soros did not say that we are nearing that position with gold around $1,080, having last month touched $1,226 an ounce. What he did create was a buying opportunity, presumably for funds controlled by Soros. For why should gold be running out of steam at this point? Even if credit growth slows, the gold market is still so small that only the tiniest fraction of this money is required to send the price much higher. Soros knows that. He also knows that gold prices show no sign of the parabolic spike that we saw in oil prices in July 2008. Surely the next most obvious spike will be in bond prices – when the current stock market sell-off really gets moving. Only after the bond bubble has blown up will gold become a candidate for the next bubble, and given the relative sizes of the bond market and the gold market that could be one humdinger of an ‘ultimate bubble’. Soros is playing his own book in Davos. Gold investors should not be alarmed but take some delight in what he is saying.

February 2, 2010 | Unregistered CommenterGold Prices

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