Gold coinage goes back to 640 BC or earlier. The metal has retained its value since, climbing to extreme highs. The market has accepted the price levels of gold without waiting for any significant dips. We have buying support from countries such as China and India. Fund Managers have added Gold to their trading portfolios. We often look to Gold in cases of national debt, currency failure, inflation, war or any conflict.
We have seen the US Dollar climb over the last month almost to the 50% retracement zone of $82.17. We were at $89.00 in June and we saw $75.235 on November 3rd. We have gone through the Fed’s added stimulus, the G20 with criticism regarding the weaker dollar and our latest relationship issues with China. It is my opinion that due to the shelling of South Korea by North Korea, we now look to China to influence North Korea in the hopes that the recent aggression should not continue. With this in mind, China would like to see a stronger US Dollar giving them the trade advantage of higher exports for China as their goods become more appealing. The usual relationship between the Gold and the US Dollar is inverse, however; the US Dollar may consolidate at that potential retracement zone. The safe-haven vehicles typically are the US Dollar, US T-Bonds and the Gold Market. We have seen the allocations shifting from Gold to the US Dollar and T-Bonds. The Euro Zone has also been a major factor in pushing up the US Dollar in that their debt woes and potential debt woes moreover give the market uncertainty and fear. First Greece, now Ireland and in the potential future, we may see Portugal and Spain or more countries. The unknown is always more fearful than the known. Traders may seek a currency that is not influenced by the health or wealth of a country and that is resilient through the ages. Globally, the price of gold has held its value.
While in our historical chart above, we see the price of Gold rise higher, we also see the dips that show our Gold still subject to market risk. Each product has market risk which needs to be analyzed prior to any strategy that one may want to employ. One should not look to Gold as the only product for their portfolio, but as an enhancement to market fluctuations within their current portfolio. Diversification is typically key in surviving the varied market conditions that dictate our market price action.
If one was long the E-Mini S&P 500 or a stock indices or perhaps a portfolio, they would succumb to some recent dips.
The Gold Market may succumb to market risk in the same manner or it may diverge from the price action of another market. One must be cautious to not overextend in the market. As often when investors may hold their stock portfolios and receive margin calls to hold their accounts in check, they may liquidate the gold within their portfolios to accommodate the calls. This defeats the purpose of diversifying ones portfolios. The importance of marginable positions to cash cushion should be 1/3rd to 2/3rds. One third in positions to two thirds cash available in the account to hold the potential positions within the account. There have been many studies in Managed Accounts and the diversification within them, it typically shows the benefits of Stocks, Bonds and Gold to create a smooth equity curve. The large investor, Fund Managers and countries typically may include Gold in their collection of assets.
The small investor that may have some hand-picked stocks and mixed investments may still want to incorporate Gold. Often times the knowledge or lack of may prevent investors from selecting products that may potentially add to the net results.
Investors may partake in the Gold moves by a variety of methods: ETF’s (China recently approved the Countries first Gold mutual fund – The Lion Fund Management Co.), Bullion (local coin shops and other physical metal establishments, XAU, Gold Mining Stocks to mention a few. The purest form of speculation in the gold market in my estimation is the futures market. To control a 100 troy ounce bar of Gold, one may put up a margin deposit in line with the exchange guidelines for that product. It is important to be sure that your excess venture capital can sustain a move within the market and place stops according to your risk tolerance. One may trail the stop, if the position moves in your favor.
Sample of a futures trade:
Buy 1 GCJ11 at $1370.00, if filled Sell 1 GCJ11 at $1357.00 STOP. (This would give you a $1300.00 risk and unlimited profit potential less commission and fees).
For those with fear of unlimited risk, one may purchase an option. The option (call or put) gives you the right to a long or short position at your strike price if the market goes through it. The option may be sold for a higher or lower premium anytime after you purchase it. You do not have to risk the entire premium if the market goes against you. You may exit anytime prior to expiration. If the trade is working, you may exit the trade for a higher premium and a profit less commissions and fees of course. The option is a wasting asset and will be subject to decline in value as time increases.
Sample of an options trade:
Buy 1 GCJ11 1550 Call option at a premium of 20.00. The risk would be $2000.00 less commission and fees. The profit potential would be unlimited less commission and fees. The option would not need to trade through 1550 to potentially become profitable. It simply needs the market to go up and inflate the premium before the time value deteriorates the premium of the option.
We just brushed over a glimpse of “Why Hedge with Gold?” to give you a brief overview on a potential addition of gold into your portfolio. It is suggested that you work with your broker to be sure that the trade is within your risk tolerance parameters at all times.
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