Gold went up for years and then it went down again. With investors expecting a continued market rally at least in 2017 Gold is down again and perhaps oversold. But, what happens when Trump’s promises don’t pan out and the US economy does not sparkle in response to his fiscal policy measures. For example, all of that corporate cash offshore might come back to the USA and then be used for mergers and acquisitions instead of job creation. If the Stock market starts to sag and worse if Trump starts a disastrous trade war gold will make a comeback. The fact of the matter is that when gold is on the way up it is better to own mining stocks than gold bullion. Should you buy gold stocks today? The Street thinks so. According to them gold stocks instead of gold belong in your portfolio.
The VanEck Vectors Gold Miners ETF (GDX) , Barrick Gold (ABX) , Yamana Gold (AUY) , Goldcorp (GG) and Newmont Mining (NEM) may be deep in bear market territory from their 2016 highs, but they are also in bull market territory since their lows and have outperformed since the end of 2015. This outperformance makes investments in gold stocks important components in investor portfolios in 2017.
The article comes with lots of graphs and the suggestion to invest on weakness whether you are looking to buy bullion, futures or gold stocks.
What Are Your Other Options?
Maybe you invested in gold or Gold Mining Stocks way back in the 1970’s or more likely in the run up from 2000 to 2011. And then you saw your portfolio slide and swore never to invest in the shiny stuff again. One tried and true way to take advantage of a possible bull market in gold and gold mining stocks is with options. We wrote about trading gold after it fell from its peak.
There are those who believe that the world economy is going from bad to worse and that paper currencies will be worthless in the long run. This thinking attracts gold buyers when the economy tanks. Then, when stocks start performing well, people start selling their gold and buying Apple.
Predicting when gold will go up or down can be chancy. This is why trading stock options on gold mining stocks may be the way to go.
In trading stock options a buyer limits his risk to the premium paid. Let us say that your fundamental and technical analysis of ABC stock indicates that it will soon rise in price. You can buy a hundred share of ABC for $100 a share or $10,000. Or you may see that you can buy a $102 option on ABC for $1. A $102 option means that you can buy to stock for $102 a share at any time up until the end of the contract. Obviously the stock is currently worth $100 a share and you would not want to execute the contract. But, if your analysis is correct the stock price will go up. Let us say that the stock goes up to $110 a share. If you purchased the stock you make $1000 minus fees and commissions. That is a ten percent return on investment. And if the stock price falls to $90 a share you lose $1000, ten percent of your trading capital. But in trading stock options on ABC you pay $100 for a $102 call option on 100 shares. The stock goes up to $110. You execute the contract and purchase the stock for $102 a share and then sell for $110 a share. You make $8 a share or $800 which is a $700 profit or 700% return on invested capital. And, if the stock price falls to $90 you lose your initial $100 and no more.
Should you buy gold stocks or options? Unless you own an infallible crystal ball the way to go is probably options, calls in this case.