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Is the Shine off Gold?

Richard Croft
April 11, 2012
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The gold bears are coming out of hibernation, at least for a little while. The price of gold slipped again last week, closing at around US$1,632 per ounce, down from a 2012 high of US$1,793 at the end of February – a loss of 9%, and down 11% from its all-time high of US$1,840 last September.

The reason – at least, one commonly-posited reason – officials at the US Fed are saying that another round of quantitative easing may not be necessary after all. At least it will not be likely if the US GDP continues to rise and US unemployment continues to fall.

Another factor affecting gold is demand in India. Apparently demand for gold has waned temporarily, owing to a jewelers’ strike. Not sure if that means there will be binge buying once these folks get back into gear.

In reality, gold has been drifting downwards since last fall, as the US economy continues to improve, and inflation remains contained. Speculative activity has eased, and while gold remains an attractive safe-haven asset, the investment price premium has shrunk as investors’ risk aversion wanes.

As a consequence, gold mining shares have felt the pinch, with the S&P/TSX Global Gold Index down 31% since last September. Individual mining stocks, like Barrick Gold Corp. (TSX: ABX) and Goldcorp. Inc. (TSX: G) have slid more than 25% in the same period. The index-tracking iShares S&P/TSX Global Gold Index Fund (TSX: XGD) is down 32%.

Speculative traders who believe that gold has further to fall, might opt to buy puts on the gold miners. But that might not be the best approach. I say that because mining companies have different metrics than physical gold. Of course their profits depend on the price of gold, but at these levels the big name miners (i.e. Barrick and Goldcorp) can wring out decent profits based on the margins between their costs of extraction and current prices.

At this stage, I would be more inclined to trade the miners from the bullish side with covered calls or cash secured puts. Specifically consider buying ABX at $40.51 and writing the July 42 calls at $1.80. With Goldcorp, buy the shares at $40.60 and write the July 42 calls at $2.20.

If you prefer to use puts, look at writing the Barrick July 38 puts at $1.40 or the Goldcorp July 38 puts at $1.70.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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