Gold: Now, or not quite yet?

by JDH on September 12, 2009

Two weeks in a row that I’m leading with the gold story. Last week I said “We are back within spitting distance of $1,000 per ounce, yet again.” Well, this week, no spitting required, as gold closed above the $1,000 an ounce level.

Last week I made the case that $1,000 is a psychologically important level for gold. I said that a sustained close above $1,000 is long term positive for gold. That is, in hindsight, and imprecise statement. A close above $1,025 is probably a more accurate indicator of a sustained break out.

GoldSept11-09

As you can see from the chart, we have closed above $1,000 twice before, at the peak in March 2008, and again in February 2009. The fact that gold is above $1,000 has put it back in the news, but technically it doesn’t mean anything, yet. Until we see $1,025, we won’t see $1,500.

The other worrisome sign is that the RSI is now at 74, which is an historically high level, and generally indicates a pullback is likely.

So, what’s my strategy?

Two weeks ago I bought the following gold and silver stocks:

AEM.TO – Agnico-Eagle Mines Ltd.

G.TO – Goldcorp Inc.

K.TO – Kinross Gold Corp.

PAA.TO – Pan American Silver Corp.

SLW.TO – Silver Wheaton Corp.

SSO.TO – Silver Standard Resources, Inc.

This week I bought more. Then, on Friday, as they were approaching their high points for the week, I covered them. I sold September call options, slightly out of the money, on each of these stocks. The options expire on September 18, so one of two things will happen: These stocks will continue to advance this week, and I will lose my stocks. That’s fine, because if that happens I will make a profit of between 4% and 12% on each of them. The stocks will get called at a higher price than I paid for them, and I get to keep the premium from the options I sold.

If the shares finish next week below the strike price, that’s fine too. I get to keep the premium, which lowers my cost of ownership, and I get to keep the stocks, which longer term I want to own anyway.

Long term I expect the stocks to increase, but short term I worry about a correction, so doing covered writes is a way to have my cake and eat it too. Yes, I’m limiting my upside, but if another market correction is imminent, protecting against the downside is a prudent course of action.

Check back next week and see how it all worked out.