MNeagle
5th June 2010, 04:45 PM
Another sad sorry article from WSJ:
Playing Gold Without Getting Killed
In Part One of this series, I said there was a chance gold might be about to go vertical.
In Part Two, I explained why I don't trust it, and wouldn't want to risk a lot of my money on it.
http://si.wsj.net/public/resources/images/MI-BD803_GOLD_DV_20100604183051.jpg
Where does that leave you?
You can see signs of a gold rush everywhere, from the nonstop TV commercials in the U.S. to the Emirates Palace Hotel in Abu Dhabi, where a vending machine now dispenses gold coins.
If anything, the nine-year gold boom has intensified as traders nervous over the European financial crisis have flocked to the metal's perceived safety. The assets in the SPDR Gold Trust , an exchange-traded fund that tracks the price of gold, jumped by more than 10% in May alone.
The question for investors who have remained on the sidelines until now is whether there still is an opportunity to join the stampede—and, if so, how to do it without getting crushed.
Gold prices have risen nearly fivefold since 2001. Yet, remarkably, some analysts say the rally might still have legs. John LaForge at Ned Davis Research notes that, adjusted for inflation, gold is little over half its peak 1980 price. Charles de Vaulx, the value-minded manager of IVA Worldwide Fund, says gold's long rally has merely put it in line with long-term averages in relation to the stock market.
The Bullish View
Hedge-fund titans George Soros and John Paulson share the bullish view. They have big stakes in gold, and have recently invested in smaller mining companies such as Kinross Gold Corp. and NovaGold Resources Inc. in the hope these might jump higher than bigger miners if gold prices continue to rise.
But the long gold rally also is stoking fears of a bubble. While that would augur for more gains in the short term, it also could set the stage for a crash later on. A similar pattern unfolded in the 1970s: gold rallied for most of the decade, peaking in 1980 at around $850 an ounce. Then it plummeted, bottoming out at around $250 in 2001.
http://sg.wsj.net/public/resources/images/MI-BD763A_GOLD_NS_20100604204421.gif
The lesson: gold can be dangerous, and its steep rise only makes it more so. John Hydeskov, senior currency analyst at Danske Bank in Copenhagen, warns that gold may be especially vulnerable to a short-term pullback now. Too much speculative money has already chased the futures market higher, he says.
That is why some investors are hoping to thread a needle, making bets they hope will pay off if prices go up, while limiting their losses if the market drops.
One way to do that is to buy call options on the GLD exchange-traded fund. Call options give you the right to buy the fund at a later date if prices rise further, while letting you walk away with only small losses if they tank.
A Safer Strategy
So instead of risking $119 a share on the GLD fund, investors could, for example, pay $16 for $120 call options good until January 2012. That would give them the right to buy the shares at $120 if gold booms, and limit their losses to $16 if gold tanks. (These are per-share values. Options trade in lots of 100.)
The call-option strategy "is a way of buying exposure cheaply," says Alan Lancz, a money manager for institutions and wealthy clients in Toledo, Ohio. He says it lets investors use "a small amount of money to get exposure even when prices are this high."
"It's one way to avoid losing incredible amounts of money," adds Larry Glazer, portfolio manager for Mayflower Advisors in Boston. "At any given moment this thing could have a massive selloff."
http://online.wsj.com/article/SB10001424052748704080104575286712075144530.html?m od=WSJ_hps_sections_personalfinance
Playing Gold Without Getting Killed
In Part One of this series, I said there was a chance gold might be about to go vertical.
In Part Two, I explained why I don't trust it, and wouldn't want to risk a lot of my money on it.
http://si.wsj.net/public/resources/images/MI-BD803_GOLD_DV_20100604183051.jpg
Where does that leave you?
You can see signs of a gold rush everywhere, from the nonstop TV commercials in the U.S. to the Emirates Palace Hotel in Abu Dhabi, where a vending machine now dispenses gold coins.
If anything, the nine-year gold boom has intensified as traders nervous over the European financial crisis have flocked to the metal's perceived safety. The assets in the SPDR Gold Trust , an exchange-traded fund that tracks the price of gold, jumped by more than 10% in May alone.
The question for investors who have remained on the sidelines until now is whether there still is an opportunity to join the stampede—and, if so, how to do it without getting crushed.
Gold prices have risen nearly fivefold since 2001. Yet, remarkably, some analysts say the rally might still have legs. John LaForge at Ned Davis Research notes that, adjusted for inflation, gold is little over half its peak 1980 price. Charles de Vaulx, the value-minded manager of IVA Worldwide Fund, says gold's long rally has merely put it in line with long-term averages in relation to the stock market.
The Bullish View
Hedge-fund titans George Soros and John Paulson share the bullish view. They have big stakes in gold, and have recently invested in smaller mining companies such as Kinross Gold Corp. and NovaGold Resources Inc. in the hope these might jump higher than bigger miners if gold prices continue to rise.
But the long gold rally also is stoking fears of a bubble. While that would augur for more gains in the short term, it also could set the stage for a crash later on. A similar pattern unfolded in the 1970s: gold rallied for most of the decade, peaking in 1980 at around $850 an ounce. Then it plummeted, bottoming out at around $250 in 2001.
http://sg.wsj.net/public/resources/images/MI-BD763A_GOLD_NS_20100604204421.gif
The lesson: gold can be dangerous, and its steep rise only makes it more so. John Hydeskov, senior currency analyst at Danske Bank in Copenhagen, warns that gold may be especially vulnerable to a short-term pullback now. Too much speculative money has already chased the futures market higher, he says.
That is why some investors are hoping to thread a needle, making bets they hope will pay off if prices go up, while limiting their losses if the market drops.
One way to do that is to buy call options on the GLD exchange-traded fund. Call options give you the right to buy the fund at a later date if prices rise further, while letting you walk away with only small losses if they tank.
A Safer Strategy
So instead of risking $119 a share on the GLD fund, investors could, for example, pay $16 for $120 call options good until January 2012. That would give them the right to buy the shares at $120 if gold booms, and limit their losses to $16 if gold tanks. (These are per-share values. Options trade in lots of 100.)
The call-option strategy "is a way of buying exposure cheaply," says Alan Lancz, a money manager for institutions and wealthy clients in Toledo, Ohio. He says it lets investors use "a small amount of money to get exposure even when prices are this high."
"It's one way to avoid losing incredible amounts of money," adds Larry Glazer, portfolio manager for Mayflower Advisors in Boston. "At any given moment this thing could have a massive selloff."
http://online.wsj.com/article/SB10001424052748704080104575286712075144530.html?m od=WSJ_hps_sections_personalfinance