A Casey Research Flash Alert
Gold's recent surge has been so sharp, any savvy investor would have to be wondering if a little correction or consolidation might be due. We saw a little of that yesterday, but market sentiment has turned so positive, we still have an opportunity to take out a new "gold insurance" trade to mitigate the downside risk in the near term.
As per our recent published analysis and forecasts, we remain extremely bullish on gold and are confident that "the world's only financial asset that is not simultaneously someone else's liability" will finish the year much higher than it is now. That said, we do see potential for near-term weakness, especially if the Fed can convince the public to ignore the man behind the curtain a little longer, so a little insurance could help many of us to sleep better.
I need to stress here that we do not expect to make money on this insurance play. While gold was falling, we did make a lot of money on our gold insurance trades, which happily offset our losses and gave us cash to buy great companies at the bottom. This time is different. We can't guarantee it, but we expect these options to expire unexercised—if that happens, we'll have made so much money on our regular stock picks, we won't mind the minor loss.
So if you're thinking of buying these puts to make money, stop right there: they really are "just in case" this time.
But if you're nervous about gold correcting once again before it heads north and never looks back—more specifically, if a major gold correction in the near term might spook you into selling your stocks in great companies that have what it takes to pull through—then this trade is for you.
As usual, we'll use GLD, the most liquid gold ETF, for this trade.
Summary: Gold appears to have reached a short-term technical top, and with its recent surge, we can once again purchase insurance on the cheap. So we've designed another "insurance" trade to protect against gold weakness in the next 2-3 months.
The trade: Buy the May 17, 2014 puts on GLD at a strike price of $115 for $0.80 or less. Buy 1 put contract for every $10,000 in gold or gold stocks you own.
Here's what to do: initiate a Buy to open order with your broker, with these instructions:
A standard options contract is for 100 shares, so it will cost $80 per contract. If GLD closes on a daily basis above $130, stop-out (sell to close) the puts for a partial loss. Otherwise, we will advise you on when to sell the puts.
Again, this is not a speculation that gold is going lower, just insurance against the possibility. That makes this trade for those who are heavily exposed to gold and gold stocks and would like to hedge some of their downside should gold fall a bit further.
Note that a perfectly acceptable alternative is to simply hold on and weather whatever storm may or may not come.