Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Stock Market At Minor Top - 22nd Dec 14
UK Christmas Sales 2014 High Street Start Dates List - 22nd Dec 14
Ruble Takedown Exposes Cracks in Putin’s Defense - 20th Dec 14
Oil Drilling Our Way Into Oblivion - 20th Dec 14
Stocks Bull Market Resumes - 20th Dec 14
Gold And Silver Nothing Is Ever As It Seems And No Respite For PMs - 20th Dec 14
What Are Technical Indicators Saying About the Stock Market? - 20th Dec 14
Here’s How You Can Still Make 27% With Apple Even if You Buy Now - 20th Dec 14
Gold Stocks to Shine in 2015 - 19th Dec 14
Why Alibaba Stock Shares Are a Screaming Buy - 19th Dec 14
China, Dollar, Japan, Europe Burning Questions for 2015 - 19th Dec 14
U.S. Economy is in a Sweet Spot! - 19th Dec 14
US Dollar and the Gold Fairy Tale - 19th Dec 14
Show Me The Money (Flow)! Tracking Money-Flow Through Value Shifts In Stock Markets - 19th Dec 14
The Commodities Market Is Not Dying, It’s Just Hibernating - 19th Dec 14
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

How to Trade Gold with ETFs and Options

Commodities / Gold and Silver 2012 Mar 21, 2012 - 05:39 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleLarry D. Spears writes: With few exceptions, most leading financial gurus agree that every portfolio should include some physical gold.

But while the yellow metal itself is great as a long-term hedge against turmoil and inflation, it's a lousy trading vehicle.


Here's why.

For shorter-term trading purposes, most gold investors look first to the futures markets, generally focusing on either the CME Group's full-size COMEX contract, which represents 100 ounces of the metal, currently valued around $165,000, or its little brother, the 50-ounce miNY gold future.

However, that can be a fairly costly proposition, with initial margin requirements on a single 100-ounce contract running in excess of $10,000.

And, as anyone who has held those contracts in recent weeks can attest, it can also be an extremely risky one.

For example, the single-day loss on a 50-ounce miNY future on Feb. 29 was $3,845, with the intraday trading range topping $5,200.

Similarly, last Wednesday's one-day decline of $51.30 an ounce in the price of the full-size April future would have cost traders on the wrong side of the move a whopping $5,130.

Even recent intraday moves have been scary.

On March 9, April gold futures plunged $27.70 an ounce shortly after the open, only to rebound and trade as much as $39.50 an ounce higher later in the day.

That swing had a total value of $6,720 - in a single 5-hour and 10-minute trading period!

So, if those numbers give you pause, but you'd still like to mine for profits in the gold market, what can you do?

How to Trade Gold ETFs
For trading purposes, you can find some pretty good proxies for gold futures that require substantially less cash up front and carry significantly lower risk.

Tops on my list of alternatives to futures are exchange-traded funds (ETFs) linked to gold, and the highly liquid put and call options available on the leading ETFs.

There are now more than two dozen ETFs tied to the gold market in one way or another - either backed by physical gold, portfolios of futures and options positions, or linked to gold and mining stocks.

Some almost precisely mimic the price movements of the metal itself. Others are leveraged to produce price changes two or three times as large as physical gold, and some are structured to move in the opposite direction from the yellow metal (so-called "inverse" funds).

The two largest and most actively traded gold ETFs - and the two that most accurately mirror gold price movements - are:

•The SPDR Gold Trust (NYSEArca: GLD), recent price $160.73 - Backed by holdings of physical gold, this is by far the largest of the gold ETFs with a market capitalization of around $68 billion and an average daily trading volume of more than 150,000 shares. The fund's shares, which are issued by the Trust in minimum blocks of 100,000, are priced at roughly one-tenth the one-ounce price of physical gold, less management expenses equaling 0.40% of assets.
•The iShares Gold Trust (NYSEArca: IAU), recent price $16.13 - IAU is a grantor trust that's also backed by holdings of physical gold. Shares are initially issued in minimum blocks of 50,000 and are valued at roughly 1% of the gold's current market price. IAU is the second largest gold ETF with a market cap of around $9.2 billion and an average daily trading volume approaching 100,000 shares. The fund's expense ratio is one of the lowest in the business, running at just 0.25% compared to the industry average of 0.53%.
Shares of both funds trade just like those of any common stock or other ETF, with prices quoted on a per-share basis.

Thus, if you want your gains and losses to roughly mirror those on a single ounce of physical gold, you would buy 10 shares of GLD or 100 shares of IAU.

So that you can see exactly how these ETF shares track actual gold prices, Table 1 compares prices for GLD and IAU with the price of the nearby April COMEX gold futures contract at key points over the past couple of weeks:

src="http://moneymorning.com/images2/gold_prices.png alt="Best Gold Prices to Trade ETF's" title="Best Gold Prices to Trade ETF's">

For cost-comparison purposes, 100 shares of GLD would cost about $16,150, or half that if purchased on margin, versus the $10,250 margin deposit and $165,000 value for a COMEX gold future. A hundred shares of IAU would cost just $1,620 or so, again about the value of one ounce of gold.

More importantly, with both funds, the losses would be proportionately smaller than the risks on a gold futures trade - a key consideration when the market is highly volatile as it has been recently.

As an example, when April futures prices plunged $51.30 last Wednesday to give contract holders a loss of $5,130, the owner of 100 shares of GLD would have lost just $256 ($162.13 - $159.57 = $2.56 x 100).

Of course, any gains would also be proportionately smaller, but the percentage returns would be roughly the same - or even larger if trading on margin.

Trading Options with Gold ETFs
Note: Options are also available on IAU, but because of the lower share price only the first couple of months and nearest strike prices are actively traded.)

That means, based on quotes early in Friday's trading session, you could purchase an at-the-money GLD April $161 call option for around $3.30 a share, or $330 for a full 100-share contract.

That option would give you the right to buy 100 shares of GLD at a price of $161.00 a share ($16,100) at any time between now and the April 20 expiration date.

If gold rebounds to its March 1 level of $1,720 in the next month, carrying GLD to around $167, that call would increase in value to $6.00 a share (or slightly more), giving you a gain of $270 or so - a return of more than 80% on your initial $330 investment. In under a month!

Similarly, if you've turned bearish on the yellow metal for the short term, but don't want to unload your physical gold, you could buy put options on GLD.

As quoted Friday, an at-the-money June $161 GLD put would cost you about $5.25, or $525 for the full contract.

That option would give you the right to sell 100 shares of GLD at $161.00 per share any time between now and June 15, at least partially offsetting the losses on your gold holdings should the price continue to drop over the next three months.

To illustrate how the option premiums track both GLD share prices and the overall price of gold, Table 2 shows the price changes in the April $166 GLD call and put (the at-the-money options on March 2) in response to gold price movements over the past couple of weeks:

Obviously, both the outright call purchase and the outright put purchase just described would be speculative plays, but that's not the only way you can use them.

The options on gold ETF shares can be used in any of the conservative or hedging strategies detailed in the "Options 101" articles Money Morning has published the past few months, or with any of the techniques discussed in our earlier "Defensive Investing" series.

Source :http://moneymorning.com/2012/03/21/how-to-trade-gold-with-etfs-and-options/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014