Call Me Golden
February 25th, 2007 by Grant in: Investing, Stock ThoughtsSo I took a dive into the precious metals market on Friday and bought 20 shares of the StreetTracks Gold Trust (GLD: chart, web) at $67.96.
Naturally that turned out to be close to the high for the day, and then dipped back down to $67.72 on the close. Se la vi.
If it continues to drop, I’ll buy more. Here’s why:
Tangible gold is not tied to the U.S. economy, or any economy for that matter. The U.S. dollar has been on shaky ground as of late, and I fear that it will continue to be weighed down as the direction of the economy is in question.
Additionally gold, in many ways, is a good hedge against crude oil, which I’m overweight in. There are those out there that actually pair up oil and gold directly, shorting oil and going long gold. As long as gold rises faster than oil (i.e. the spread between the two gets larger) you win.
While I’m bullish on oil, the gold market has a tendency to be just as volatile but on the scale is a factor 10 above oil.
As for where to sell, I’m not quite sure. Some are proclaiming that gold could easily trade at $1,000 per ounce, but I’m not as optomistic. I think a somewhere between $800 and $900 is more realistic near term, but it will all depend on how the world economics plays out in the next year or two.
I may have my buddy Winston weigh in on the oil and gold hedge, as he’s much more in tune with advanced trading scenarios than I am.
Until then, call me golden!
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February 26th, 2007 at 2:45 pm
Reserve banks have been selling dollars and buying other assets for quite a while, one of these assets being gold. In my opinion, gold is a great hedge against weak currencies and uncertain/weak equity markets. You may be a little late to the game for realising a decent return on your 20 shares, dollar-wise, but I think it’ll work out okay for you. Deutsche Bank recently created another gold etf, DGL is the ticker. Check it out, it trades at a lower dollar value which means you’ll be able to pick up more shares and be able to leg out of a position better.
The whole idea behind a ’spread’ is that it gives traders/investors increased leverage, and is good for holding trades over a longer period of time. For instance, say you buy a gold futures contract. You have to pony up $2,552 and your broker/clearing house will consider you to be outright naked long of gold…if your gold contract drops below $1,890 in margin money you’ll have to pony up more money from your account, and if you don’t have that money than you’ll have Guito looking for you. However, if you sell a silver contract (perhaps you think gold is trading at too large of a discount to silver), your clearing firm will give you a larger percentage margin for the trade, I believe it’s 70%.
February 27th, 2007 at 7:16 pm
I hope you’re not too late to the gold rush!
Winston, I like the spread idea, but I’m not sure I can draw a direct corellation between gold and oil…
February 27th, 2007 at 7:17 pm
Winston are you a professional trader? You seem to have some keen knowledge of makrets. Do u have a blog?
February 27th, 2007 at 9:32 pm
Stu, for the gold/oil spread, I’ll try and send Grant a chart of being long GLD and short USO. Although this isn’t the greatest spread ratio-wise (since USO doesn’t truly track crude), it should give you a since of a spread. I’ll also send him a spread of being long big cap stocks (S&P) and short small caps (Russell 2000)….might send a clue to start investing in large caps again…
Amerie, I had a blog once but couldn’t keep up with it, thus no one read it….
February 27th, 2007 at 11:26 pm
Thanks for the info, Winston, I’ll add those graphics tomorrow.
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