Trump Charged Dive in Gold is Opportunity for Option Sellers
Initial Reactions to Trump Victory Torpedo Gold Prices. The Volatility it Created could be a Cash Cow for Option Sellers.
As initial anxiety over Donald Trump’s victory gave way to market euphoria last week, there was a casualty.
Gold, often a safe haven for investors in times of uncertainty, saw strength in the weeks leading up to the election, capped off by a turbo-charged surge on election night. But as traders began to view the stock market nosedive as a buying opportunity, the “risk on vibe” was back.
Trump’s surprise election victory drove gold prices lower. Is it time to buy now?
And as they started buying stocks, they began unloading all of their long gold positions.
Gold prices have tumbled nearly 10% since election night highs and some analyst see it falling a lot further.
We’re not so sure. In fact, longer term prospects for gold are looking stronger with a Trump White House. That being said, investors can benefit from the volatility in gold today – not by picking market direction, but by simply extracting cash out of the bountiful gold market. Here is how.
The Fall of Gold
There have been numerous explanations as to why gold prices fell like an Elizabeth Warren wealth redistribution plan last week. For one, bond yields have surged, making gold less attractive to “safety” investors. Secondly, the prospect of a more robust economy could cause the Fed to raise rates at a faster pace, potentially stalling growth and thus, gold prices.
Lastly, the US dollar has surged on Trump related optimism. The surge the US currency can pressure commodities in general. But Gold is particularly susceptible to such swings.
Our take, at least in the short term, is more simplistic. The recent sell off in gold is due to pre-election speculators unwinding their massive long position (as of November 1, the spec long position in gold stood at 215,131 contracts.) A conclusive election, regardless of outcome, removes uncertainly from the market. Uncertainly spurs gold prices. Clarity can bring liquidation as investors scamper to pull money out of “safety” and pour it back into potentially more lucrative investments. Thus prices fall. Markets 101.
Gold’s Trump Card: Inflation
Despite all of the previously mentioned reasons to be a gold bear, Gold prices likely hold a Trump card (I couldn’t resist that one) in 2017. It goes by the name of inflation.
As the Wall Street Journal astutely pointed out on October 28th, the rate of inflation is currently so low that even a modest uptick could have a considerable ripple effect.
And even prior to the election, we were already starting to see that ripple. Zinc prices recently hit a 5 year high. Copper prices, often seen as a bellwether indicator of economic growth, has soared 8.7% since the Trump victory.
We’re interested in extracting cash out of the gold market – not necessarily owning it.
December 2016 Copper
Copper prices were already in an uptrend before the election. A Trump win, along with republican victories in the Senate and House, brought expectations of a massive infrastructure rebuilding plan. This poured gasoline on an already simmering copper market.
This is because the global economy is showing signs of life. With US wages up, unemployment down and expectations for rising GDP next year ( the latest Wall Street Journal monthly survey of economist shows US GDP expected to grow by 2.2% in 2017 and 2.3% in 2018,) outlook for industrial demand is increasing. More importantly, the slowing rate of growth in China appears to be abating, for the time being.
Copper’s meteoric rise is probably overdone. But its indication of global expectations is unmistakable.
Of course, the economic elixir of lower taxes and investment in infrastructure (Trump’s plan proposes spending $1 trillion over the next 10 years) make the strongest case for inflation. The same WSJ poll cited above shows economist expecting inflation at 2.2% in 2017 and 2.4% in 2018. Should this be achieved, inflation in 2018 would be 25% higher than 2016’s 1.8%. We see that as a little more than a “modest uptick.”
An increasing pace of interest rate hikes could certainly put a drag on inflation. However, central banks around the globe have been trying hard (largely in vain) to spur inflation for eight years now. A little inflation can solve a lot of problems for nations in debt. Do you really think they are going to step on the green shoot right as it begins to emerge from the dirt?
We see the Fed taking a continued dovish stance on rates at least for the next year.
The rally in Zinc, Copper and other industrial metals is, in our opinion, a prelude to rising commodities prices as a whole in 2017. And while commodities are affected by much more than just inflation (supply and demand), it is gold and silver prices who most directly mirror it.
Is it Time to Buy?
With last week’s ugly sell off in gold, producing an even uglier daily chart, one may wonder if this is the right time to be considering buying gold.
After all, it was Buffet that said to be greedy when others are fearful.
Does that mean you buy gold now and hold on for a ride? Not in my book. Buying for appreciation is not typically the most efficient way to invest. As we already stated, despite positive outlooks for inflation in 2017, that has no correlation to how gold prices may behave in the short term. Buying for appreciation is, regardless of how logical the concept, speculating on outcome.
I prefer to get paid up front – regardless of what the market does.
My personal opinion is that every high net worth investor should own a little physical gold – if for nothing else than the tangible feeling of security it provides.
Here, however, we’re not interested in buying for the long term. We’re interested in extracting cash out of the gold market – not necessarily owning it.
The truth is, I don’t know if its time to buy gold yet. Fortunately, that doesn’t matter to me, or to you if you’re an option seller. The good news is that the recent roll in gold prices has brought a surge in volatility, especially to put options.
That means higher option premiums at deep out of the money strikes. As a FUDOM option seller, that’s manna from heaven. And it sets up high yielding put sales for investors wishing to position for higher inflation in 2017.
Why Would You Want to Sell Puts?
By utilizing a put option selling strategy, you’re giving up on trying to pick a low in the market. After all, gold prices have taken on the chin and they could keep on falling. Why risk buying it here when you can simply pick a point well below the current price and say “It may keep falling, but it won’t fall that far.”
This is what put sellers do. And they get paid up front to do it, regardless of if the market keeps falling (moderately), stabilizes, or reverses higher. They seek to harvest cash, not necessarily pick market direction.
The concept of harvesting cash from a market as opposed to speculating on its outcome is one we address in our free investment guide The Option Selling Solution. In the meantime, you can put it into practice by selling put options on the gold market.
Healthy put premiums are now available in 2017 gold contracts as a result of the recent price slide.
June 2017 Gold
Selling the June Gold 975 Put
We’ll be working closely with private clients in positioning in the gold market in the coming weeks.
Non clients can consider selling the June Gold 975 put for premiums of $500+ in the coming days.
Gold could reverse and start trekking higher today. Or it could keep falling for a while. But with inflation finally seeming to awaken from a long slumber and pro-growth policies almost certainly on the way, we don’t think it can fall that far.
And as an option seller, that’s all you have to determine.
James Cordier is author of McGraw-Hill’s The Complete Guide to Option Selling, 3rd Edition and head portfolio manager at OptionSellers.com – a wealth advisory firm specializing in option writing portfolios for high net worth investors. James’ trademarked Premium Sniper investment program has been used by elite investors from the US, Australia, the United Kingdom, Singapore, Malaysia and Dubai. For more information on OptionSellers.com’s services, visit www.OptionSellers.com/Discovery.