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Core Positions to Weather the Storm

I predicted gloomy economic times ahead in a recent Commentary. There are others who believe in a similar fate including Nobel Prize Winning Economist, Robert Shiller, who sees ‘bubbles everywhere’ and offers advice to ‘invest even though you expect the price to decline’ according to the Investor’s Business Daily piece. That might be the worst advice I ever heard. There are ways to weather the storm when macro forces are blowing full gale. In fact, it is an opportunity to add a core position. These are positions that I intend to hold for a significant period of time. Trading pays the bills while core positions can really build wealth.

I described in my Macro Trading Commentary that I established a core position in precious metals for reasons extolled by the experts mentioned in that post. I am not a perennial gold bug although there are solid portfolio benefits to owning gold in the long term. I see gold as a major winner as we head into economic winter. This post is a review of the many ways to go long the precious metals complex. 

Gold and Silver Bullion

Owning physical gold and silver might make sense if you believe there is a calamity on the way. There are no counter parties, but you do have to contend with security risks and additional costs.

Gold and Silver Futures and Options on Futures

I prefer to bet on rising precious metals prices by utilizing futures and futures options. Futures are capital efficient. One GC future controls 100 ounces of gold. One SI future controls 5000 ounces of silver. The markets are liquid and deep and allow for easy rolling of options to lower cost basis. This is especially true when volatility is elevated. I own GC futures and have sold GC and SI puts to go long. The leverage is a double edged sword so it is very important not to get too big in these positions as a relatively small decline can wipe out an account and more. Keep the notional value of the contracts in mind.

Gold and Silver ETFs and Options

There are numerous gold and silver ETFs. Some of them are very liquid including GLD, GDX and GDXJ. Selling puts in these underlyings is a decent strategy for going long precious metals especially if a trader is unable to utilize futures. Silver ETFs tend to be less liquid. Silver is known to be more volatile than gold so it is possible that the potential percentage gain of silver will exceed that of gold when the precious metals start moving upward. 

Gold and Silver Equities

The are many stocks in this universe although most of them have small market caps which makes it difficult for large players to engage. This is another way that retail traders have an advantage. The various type of companies include producers or near producers, royalty and streaming companies, explorers, and prospect generators. Producers are companies mining precious metals. Near producers are companies developing a mine. Royalty companies offer financing for the right to take a percentage of the precious metals mined. Streamers pay a fixed discounted amount for the precious metals mined by a company in exchange for financing. Explorers are active in the search for deposits and prospect generators are an explorer subset that de-risk exploration by developing partnerships to defray their costs. I will elaborate on each type of equity as they are added to Speculations.

I have been adding to precious metals positions on this recent weakness as I expect prices to rise in the new year.

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