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Gold, the oldest protective play there is, is new again. Coronavirus is tightening its grip on the U.S. economy. Did you see the second quarter GDP numbers? A record-breaking 32% contraction.
The third quarter should be at least a bit better, at least on paper, but with the pandemic no one I know is staking much on that.
No wonder the yellow stuff just hit an all-time high of $1,971 and change just this past Monday. That's a gain of a bit more than 27% for 2020, and 36% for the past year.
Gold isn't alone in this upward climb - other precious metals, including silver, have seen a steady uptick in price in response to the pandemic. Silver climbed to multi-year highs and is now just off them.
Then you've got gold-backed exchange-traded funds (ETFs). Holdings in those have smashed records, as they have just about every month since late last year.
I don't think the run is over - not by a long shot. Some conservative analysts are saying gold could top $2,000 an ounce before the year is through. I think that's just like how it sounds: conservative. At this rate, it's not out of the question to think it could top $2,000 way before Labor Day.
Why? Easy: It's the "usual suspects."
What I mean is, the Fed's not even going to think about raising interest rates for the rest of 2020, and probably the year after this. Money-printing is kicked into overdrive, if not permanently at least for the intermediate term.
The Fed and the government are going to do everything they can to keep the dollar soft and give America the best chance to get its export mojo back, to make spending money here attractive to the rest of the world.
At this point, doing anything different would probably be political and economic suicide, or, put another way, career suicide for politicians and economists.
And so, yes, every investor should have long gold positions right now. They'll be protected, sure, and they'll see some appreciation - even more as the toppy market rolls over and the dollar weakens further.
But here's the thing: For as many investors as are rushing in right now, I'd bet very few will realize how to play gold, let alone maximize their gold profits in this climate.
Here's the Right Way to Do It
You want to make sure you own physical gold - and that you're set up to store it safely or able to make arrangements to have that done for you.
Or - a bit more practical for most of us - you can own shares in a gold-backed ETF.
Like a lot of other folks, I like the SPDR Gold Trust ETF (NYSEArca: GLD). Those shares are backed by the real McCoy: yellow metal in a secure vault. According to World Gold Trust Services, as of March 31, 2019, the SPDR gold trust had 24,572,554.8 ounces of gold worth a cool $31,697,578,486.50 socked away in vaults in London and around the world.
I'll share a high-profit GLD trade with you in a second, but before I do that, I'd say that I don't recommend buying gold on days, or during multi-day runs, when it's going up. Why buy that way? Instead, buy it on pullbacks; you almost never have to wait long for one, and you usually don't have to wait long to see your investment start climbing again.
Thursday, for instance, GLD shares were down 1% or so. Good time to buy, seeing as how gold will probably be on its way back up by Monday. Any dip here is an opportunity to jump.
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Same with gold miners, the companies that go around the world to pull gold out of the ground. They're generally "on sale" right now, meaning undervalued. John Hathaway at Sprott Asset Management USA Inc. put it best when he told Bloomberg that miners are "exceptionally undervalued, both on an absolute scale and relative to the metal itself.
I couldn't agree more. Newmont Corp. (NYSE: NEM), out of Colorado, missed on its earnings Thursday; it came in at $0.32 per share against Zacks' estimate of $0.34. Big deal - it more than doubled its earnings over last year, which were just $0.12 a share. Newmont's dip is a classic buying opportunity.
"Flat" and long is the way to buy gold these days.
Now, as I promised, I've got a potentially very profitable gold trade lined up right now that could make several times the money. It's a butterfly - two "legs," buying and selling four options expiring on the same day at different strike prices on the same stock.
- I want you to buy one GLD Dec. 18, 2020 $195 call.
- At the same time, sell two GLD Dec. 18, 2020 $205 calls.
- And buy one GLD Dec. 18, 2020 $215 call.
You're risking $100 per 100 shares for a chance at $900 per 100 shares. You make money if GLD is between $196 and $214 by expiration. You make the maximum possible profit if GLD is trading at $205 on Dec. 18. And you want to sell if you hit 50% or more of the maximum possible profit or no later than two days before the options expire.
I'm going to be watching GLD and gold miners very, very closely in case my proprietary S.C.A.N. system flashes a signal for me to send to my paid subscribers.
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About the Author
Andrew Keene is a globally known trader and a renowned expert on all things options.