Back in 2012, Stephanie Pomboy, founder of MacroMavens, made a
rather scary prediction in a
interview. She called for the end of fiat money and a return to
gold as the backing of global monetary value.
The argument wasn't an uncommon one at the time. Central banks
around the world were printing money as fast as they could to dig
their economies out of the deepest recession in nearly eight
decades. The Federal Reserve was well on its way to quadrupling
its assets to $3 trillion from 2007. The Bank of Japan was
embarking on a plan to double its own assets by 2015. Even the
conservative European Central Bank (ECB) was cutting rates,
though it did not join the asset-buying party until recently.
The idea was that if debtor nations were going to devalue
their own currencies by massive money-printing programs, then
creditor nations would demand a return to gold-backed monies.
Pomboy's prediction for a return to gold has obviously not
come about yet. To be fair, her five-year window doesn't close
until mid-2017. While I don't agree that fiat money will come to
an end, Pomboy certainly hasn't been alone in calling for
investors to look to gold for protection.
Hedge fund guru John Paulson saw his reputation sink along
when the metal lost 28% of its value in 2013, the steepest drop
in 32 years. Yet Paulson, one of the most well-known "gold bugs,"
still owned 10.2 million shares of
SPDR Gold Shares (NYSE:
worth $1.31 billion as of his firm's June 30 SEC filing.
The graphic below paints a pretty strong picture for what gold
bulls have been saying for years. As a percentage of GDP, central
bank balance sheets exploded after the financial crisis. The debt
held by the Bank of Japan is approaching half of the country's
total economy with the ECB and Federal Reserve not far
To date, warnings for faster inflation have not panned out.
Price increases of 1.6% in the United States remain below the
Fed's 2% target, and policymakers are still worried about
deflation in Europe. But the whole scenario feels eerily similar
to the lead up to the bursting of the past two stock market
bubbles. Many warned for years that Internet stocks were
overvalued and that real estate prices were escaping reality
before their respective crashes.
Even billionaire George Soros, who referred to gold as "the
ultimate bubble" in 2011, bought 6.3 million shares of Barrick
) in the fourth quarter of 2013 for more than $100 million. Soros
recently sold much of his Barrick stake but increased his stake
in Market Vectors Gold Miners ETF (NYSE:
) in the second quarter of 2014.
Technicals Indicate GLD is Oversold
While the price of gold tumbled violently from its highs early
in the decade, it has traded mostly sideways for more than a
year. In fact, GLD has not deviated more than 8% from the median
price of $124 throughout the past year. Even when the price of
gold tumbled to $1,193 per ounce in December 2013, GLD touched
just under $115 per share.
The chart below presents the trading range for GLD over the
past two years with
at 2 standard deviations around the price. Shares may find
support in the near-term as the price bounces off of the lower
GLD now looks oversold after falling more than 6% since the
beginning of July, with the slow stochastic below 20. This
condition has occurred several times this year, and each time
shares have bounced.
GLD Covered Call Strategy
Even if it takes years to see the gold bugs proven right on
monetary policies and inflation, the price of gold has found
considerable support around $1,200 an ounce.
I would expect jewelry demand in India and China to rebound
over the next several months following steep drops earlier this
year as consumers snap up lower prices. The Indian festivals of
Dhanteras and Diwali should boost demand, along with the upcoming
Indian wedding season.
With GLD trading at $120.87 per share at the time of this
writing, we can set up a
trade by buying 100 shares and simultaneously sell one
GLD Nov 125 Call
, which is trading around $1.35 ($135 per contract) for a net
cost of $119.52 per share. This offers you about 1% downside
protection from current levels.
If GLD rebounds above $125 by expiration on Nov. 22, your
shares will be called away at the $125
. In this case, you will earn a $5.48 per-share profit, or 4.6%,
in 73 days. That amounts to a 23% per-year
rate of return
I like the trade as long as you can get in for a cost basis
below $120, which still leaves you with a gain of 4.2% if shares
are called. If GLD fails to rally to $125 by expiration, you keep
and can sell more calls with later expirations. Your total cost
on the position will decrease with each successive round of calls
The current price of the option is about 1.1% of the stock's
price. Selling an option for that amount every 73 days would
generate income of about 5.6% a year. Since gold pays no
dividends, this is a great opportunity for income investors.
I would not count myself in the camp calling for an end to
fiat money or even inflation of more than 3% in developed
markets, but I do believe there is significant support for gold
prices here. Some short-term pain is possible if prices fall back
toward $1,200 per ounce, but that seems to be a natural low. A
covered call strategy can provide a consistent paycheck with a
nice upside surprise when prices eventually rebound.
Selling covered calls is like collecting "rental income" on the
stocks you own. If you're not renting out the stocks in your
portfolio, you may be missing out on the easiest income around.
See how you can collect $1,200 or more each month by
This article originally appeared on ProfitableTrading.com:
Gold Bug or Not, Get Positioned Now for the