How to Make Money with Gold, Despite the Plunge

April 18, 2013 at 08:16


Stephen Hammers, co-manager of the recently launched $23 million Compass EMP Commodity Long/Short Strategies fund, doesn’t expect gold’s downward trajectory to last very long.

As the price of gold fell to $1,640 in February, Hammers decided it was time to go short the precious metal. Two months later, his bet looks prescient.

Gold futures plummeted 9.4 per cent Monday, to a two-year low of $1,360.60 an ounce. On Tuesday, gold was last trading at $1,377.48, up about 0.7 per cent.

Hammer expects gold to jump back above $2,000 an ounce next year amid political and economic strife. He is already planning to start buying gold again by the end of the year.

It’s a back-and-forth dance move that other investors are practicing as well.

Factors from the rising US stock market to Cyprus’s announcement that it planned to sell most of its gold reserves, have pushed gold into a bear market, or down more than 20 per cent from its 2011 high.

Minutes from the latest meeting of the Federal Reserve also hinted that the central bank may strengthen its monetary policy this year by ending quantitative easing, potentially strengthening the dollar against gold.

“Technically, the long-term bullish trend in gold is still intact but the short-term trend is clearly bearish,” said Gareth Feighery, a founder of options education firm in Philadelphia.

Many investors remain convinced that the factors that pushed gold to its heights will reemerge as the United States continues to grapple with its debt problems and central banks eventually begin tightening interest rates. PIMCO’s Bill Gross, manager of the world’s largest bond fund, wrote on Twitter on Monday that “I would still buy gold here. World reflating.”

No one knows where or when the price of gold will stabilize. But here are ways that investors can take bullish and bearish positions in the metal now.

Gold remains the best hedge in case of a financial crisis or currency deflation, experts say.

“This sell-off has presented a great opportunity to buy the insurance that gold provides much more cheaply than they would have been able to even a few days ago,” said Michael Cuggino, a portfolio manager of the $15 billion Permanent Portfolio . The mutual fund has approximately 22 per cent of its assets in gold, which is unchanged over the past year.

Cuggino’s fund holds a diverse line up of assets including Swiss francs and US equities such as Exxon Mobil Corp and oil refiner HollyFrontier Corp.

Investors who want to take a more direct stake in gold can buy exchange-traded funds (ETFs) like the SPDR Gold Trust

or the iShares Gold Trust, both of which track gold futures and are closely correlated to the price of gold. Consequently, SPDR Gold Trust is down 25 per cent from its 52-week high and iShares Gold Trust is down 23 per cent.

Options also allow investors to bet on the price of gold, but they are more complex.

Selling puts is one way to generate income while holding a long-term gold position, said Jared Woodard, principal at Condor Options, a research and trading advisory firm in Forest, Virginia.

An equity put option gives the right to sell the security at a fixed price by a certain date. When an investor sells a put, they receive the premium from the buyer.

Here’s how the strategy works with gold ETFs: the June $125 SPDR Gold Trust strike put could be sold for a premium of $2.04 based on a fund price of $134.29 per share, Woodard said. The investor would keep that premium if SPDR Gold Trust shares remain above $125 at June expiration.