Facebook – Say Goodbye; Say Hello to My Covered Calls on Gold

by JDH on May 26, 2012

Last week I asked the question Facebook or Gold: Which is the Better Investment? and I concluded, of course, that gold, over the short, medium, and long term, will be a better investment.  The IPO debacle, followed by the big drop on Monday, has proven the point.

Of more interest, perhaps, is whether or not Facebook will even exist in a few years.  My guess: no, it won’t.

I’m not a Facebook guy; I have an account, butI last looked at it two years ago, for five minutes.  I find it creepy; I don’t care what some person I last saw in high school 30 years ago had for lunch today.

Aside from my personal feelings, the revenue model makes no sense.  It would appear that they generate revenue of around $5 per user per year, which is not a great way to make a profit.  Unless users click on ads there’s no revenue, and most people I’ve talked to simply tune out the ads and ignore them, like we do most everywhere else on the internet.

Even worse, an ever greater percentage of the populace are accessing the internet via their mobile devices, which give much less real estate for ads than a full size desktop computer monitor.  That’s bad news for Facebook.

But the news gets worse.  Facebook started out as a college student social network.  A “facebook” is like a yearbook, only you get it at the start of the college year, so you have pictures of all of your fellow students, so you can put a name to a face.  In the early days you could only join Facebook if you had a “.edu” e-mail address (for “educational” institutions).  It was a young-person network.  Back in those early days, college students uploaded pictures from their digital cameras to Facebook; it was cool.

Today, no-one has a “digital” camera anymore.  We have smart phones, and we take pictures with our iPhones or Blackberrys.  We don’t need to upload them to Facebook; you just take the picture, click on the “post to Twitter” link, and off if goes.  It’s easy, and simple.

Do college students still use it?  I don’t know, but I’ll tell you who does use it: “old” people (by “old” I mean people older than college age).

Here’s a true story:

One of my employees told me about having her husband’s grandfather over for dinner.  The grandfather (I’ll call him “Joe”), is 90 years old.  He likes to have a beer (or two) with dinner, and after a beer he got to complaining, as old people are wont to do.  (I do it all the time myself).  His big complaint, and I quote:

“Those damn idiots at Facebook; they keep changing where the damn buttons are and I can’t find anything anymore!”

Yup, the 90 year olds don’t like all the changes on Facebook.

Why would old people use Facebook?  I guess if I was a grandparent, living in a different town from my children and grandchildren, it would be a great way to stay in touch.  I’m all for it.

However, what type of advertising revenue can you generate from senior citizens?  They tend not to be heavy consumers.  Advertisers want the 25 to 54 demographic, the prime buying years.  Facebook won’t be a big revenue generator for senior citizens.  Also, us old people have trouble reading on small phone screens, so people over the age of 40 are much less likely to be accessing the internet on small devices, which will also hurt Facebook.

So, to conclude, I didn’t buy Facebook at the IPO, and I won’t be buying it, ever.


Of course what I have purchased is gold, and gold shares, and that hasn’t proven to be a great investment this year.

Year to date the price of gold is up an incredible 0.33%.  That’s essentially flat, after a drop of 1.15% on the week.  Oil is down 8.15% on the year, and is probably headed lower.  The TSX Venture Exchange, home to many junior precious metals stocks, is down almost 12% year to date.  That’s not good.

If Greece leaves the Euro, and if the markets continue to correct, gold and silver may drop lower.  So be it. Three weeks ago I increased my holdings of some blue chips, including AEM.TO – Agnico-Eagle Mines Ltd.  On Friday, after two solid weeks of gains, I started locking in profits by writing covered call options.  Here are the specifics:

On April 20 I bought 500 shares of Agnico-Eagle for $33.  On May 9 I bought 500 more for $38.34.  On Friday the shares closed at $41.02, for a nice gain this month.  I bought the shares for the upside, but also for the dividend yield, which at the time I bought was around 2%, much better than you can get in a T-Bill.  So, to lower my cost base, on Friday I sold 10 contracts (to cover the 1,000 shares I own) of the June 42 calls, which expire in three weeks, on June 16, 2012.  I sold them for $1.15 each, so in effect I have lowered my cost per share by $1.15.

If on June 15 the shares are trading at $42 or above, or about $1 higher than they are now, I will be forced to sell my shares for $42.


My average cost is 500 x $33 + 500 x $38.34 = $35.67, less the $1.15 I received for the calls, for a net of $34.52.  If you include commissions the cost goes up to $34.56 per share.

If I get $42 in three weeks, that’s a profit of $7.44, or 17.7%; sounds fine to me.  If the share price is below $42, the options expire worthless, I keep the premium, and I continue to own my stocks which will continue to generate a 2% dividend, which was the point in the first place.  I’m fine with that.

That’s the plan, so I will sit and watch.

And no, I won’t be discussing it with anyone on Facebook.



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