Posts Tagged ‘Gold’
Smart Investing Daily – Is It Time to Buy Silver?
Friday, 06 May 2011
Unless you have been hiding under a rock, you probably know that silver has had a major correction over the past week. The precious metal plummeted about 30% from a high of almost $50 an ounce to less than $35 yesterday. This six-day drop is one of the largest since 1983.
Silver has given back just about all of its gains for the past month and some traders are thinking it might be time to get long. But before you run and buy silver, there are a couple things to consider.
Forces That Move Silver
The U.S. Dollar
There are many theories on why this sell-off is happening. Obviously, any real strength or even support in the U.S. dollar will generally be bearish for precious metals like gold and silver. This is mostly because the U.S. holds the largest stockpiles of these metals and they are traded in U.S. dollars globally. Even though gold is more of a recognized currency, they both have sensitivity to changes in the U.S. dollar’s value.
The falling U.S. dollar has recently leveled out. That means we’ve seen a small correction in dollar-denominated commodities and metals overall. Earlier this week, the European and London central banks held their rates steady. The ECB also hinted that they may not raise their rates next month either. This is good news for the U.S. dollar.
The U.S. dollar traded higher late in the day yesterday and sent other dollar-sensitive commodities like oil and even stocks much lower on the day. Oil had its largest percentage drop in three years. If you don’t believe that the dollar is in control here, think again…
For now, it seems that the U.S. dollar will continue to be relatively weak. The rally seems more like a short-term bump rather than a long-term trend. Current Federal Reserve policy puts general downward pressure on the U.S. dollar.
Gold/Silver Ratio
Then there is the historical ratio between gold and silver. A good “average” ratio of gold to silver is about 55, according to many experts. That means 1 oz. of gold should buy 55 oz. of silver. The gold premium is because there is much more silver on this Earth than gold. Even though silver has industrial uses beyond gold, there is a global desire, respect and currency reserve with gold that silver just does not have.
If that ratio gets extremely high, like 100, that means that silver is cheap relative to gold and may Read more
From Smart Investing Daily – An Easy Way to Buy Real Gold in Your Brokerage Account
| An Easy Way to Buy Real Gold in Your Brokerage Account |
| Written by Jared Levy, Editor, Smart Investing Daily | |
| Friday, August 13, 2010 11:46 | |
 The second week of August is proving to be a volatile one for the equity markets. After the Federal Reserve’s extremely unexciting intention to begin using the proceeds from maturing mortgage bonds acquired during the crisis to maintain its holdings of domestic securities around $2 trillion, the financial markets didn’t seem to react positively. That action was more of a prevention of monetary tightening versus true monetary easing, which many economists and traders still believe the economy needs. When you couple this lack of action with Wednesday’s worse-than-expected trade balance number and a slowdown in Chinese factory production, you had a recipe for disaster! Of course to top it all off, weekly jobless claims jumped to 484,000, not good… The S&P 500 (SPY, SPX) index violated some key short-term bullish indicators this week, which is one of the reasons we saw that sharp drop on Wednesday, which in turn pushed the index into negative territory for the year. The financial market remains in a fairly bearish long-term trend being that the 200-day simple moving average (currently about 1,115) is still above the current price of the index. That same moving average will be upside resistance for the broad market and a level we must break out of if we are going to see a change in trend.
Many of your brokerage accounts have been taking a beating and if you just chicken out (like we all do sometimes) and put your money in the bank, you’ll be lucky to get 1%, which is actually costing you money when you consider the average inflation rate of 3%+ over the past 10 years. |
Gold is on a Tear Again…
So the yellow metal is back on the upswing and so is the dollar. When you are buying gold, on some level you are getting short the U.S. dollar. But what if you want to remain long the dollar as well? As a result, any investment in gold itself may be tied to the dollar and its relative strength (or weakness) to other currencies, namely the euro, yen, pound, etc.
This negative correlation may theoretically reduce your potential profits, because the strong dollar negate some of gold’s rally in dollar terms The dollar represents the majority when it comes to liquid currency reserves, and the current global monetary system relies on the U.S. dollar as a reserve currency by which major transactions (gold included) are measured. This is the basic reason for this relationship.
Euro-denominated gold and its recent sharp rally have been in the news and the subject of blogs, chat and other coverage (aside from the rally in spot gold everyone is talking about).
Just yesterday, a colleague of mine on CNBC’s Fast Money, Dennis Gartman, talked about getting long gold in yen terms. On the show it seemed that everyone was baffled by his explanation of how to do this, so I thought I would share my thoughts about getting “synthetically” long gold in a dollar-neutral (vs. the euro) sort of way.
Please don’t take my words as a buy/sell/hold recommendation on Gold or any of the products mentioned. (Note: prices given as of Tuesday’s close).
One of the most popular ways for the retail trader to be long in Gold (other than the futures market itself) would be to buy the SPDR Gold Trust ETF (NYSE: GLD), which closed at $121 on Tuesday.
Long Calls in the Gold Trust
For options traders who want to synthesize a long position, one might choose an in-the-money call on the GLD. Let’s assume you bought 10 September 114 calls for $10.00 each. This would be an investment of $10,000 (the maximum loss in the trade) and would give you roughly 720 deltas in GLD. By taking this position, you are obviously taking a bullish position in gold itself. But let’s assume you thought the dollar would continue to strengthen against the euro. Any relative strength in the dollar might counteract natural price changes in gold unrelated to dollar changes. Because of this relationship, some traders may choose to neutralize that potential counteraction.
Balancing Out the Dollar/Gold Dichotomy
One way options traders can attempt to neutralize the impact of the dollar is to take a look at the Euros WCO ETF (NASDAQ: XDE). This is a euro/U.S. dollar ETF product offered by the NASDAQ OMX and ended yesterday’s session at $119.74.