Gold: Trying to Push a Balloon Under Water

by JDH on September 15, 2012

Have you ever tried to hold a balloon under water?  You can push it under, and for a while it may stay there, but the further you push, the harder it is to keep it under, and eventually it pops back up to the surface.  Sort of like what gold has been doing these past 10 years or so.  It’s inevitable.

If you look at the gold chart since 2000 (you can make your own gold charts at Kitco for free), you can see obvious peaks, where the Big Boyz attempted to push the gold balloon under water, and while they succeeded for a period of a few months, or even a year, invevitably gold bounced back up, over the old high.  The only exception is the peak last summer, which has not yet been exceeded.

I think we all agree it’s only a matter of time.

How long?

Hard to say.  If I had a crystal ball I would tell you.

Gold Chart Two Year

A two year chart would appear to indicate that we are approaching a significant resistance level around $1,800, a level the balloon was pushed down at back in November 2011 and again in March 2012, and it has yet to bounce back up over that level.

The RSI is high, and the MACD is increasing, so I believe a push back at around the $1,800 level is a very likely outcome.  Inevitably that level will be breached and we will return to $1,900, but it’s usually two steps forward and one step back, which is why I’m likely to cover again.

As I mentioned last week in Gold Rocking, But I’m Covering, I covered three of my blue chip gold and silver stocks, but selling short term, out of the money calls.

I covered RGL.TO – Royal Gold Inc. by selling the September 88 calls for $2.  The correction earlier this week brought the stock down, so on September 11 I was able to buy back the calls for 60 cents.  Sweet.   That’s a profit of $1.40 in a few days.

(In the interest of full disclosure, there are commissions on these transactions.  In this case I covered 1,000 shares, so I sold 10 contracts (each of which represent 100 shares.  I received $2 x 10 contracts x 100 shares = $2,000, less a commission of $22.49, for net proceeds to me of $1,977.51.   I then repurchased them to close out the transaction paying 60 cents x 10 x 100 = $600, plus a $22.49 commission = $622.49, so the net proceeds to me were $1,977.51 – $622.49 = $1,355.02  Since I own 1,000 shares, that is effectively a profit of $1.35 per share.  Or, viewed another way, I have now lowered my cost of ownership by $1.35 per share, since I still own the underlying shares).

I also covered SLW.TO – Silver Wheaton Corp. by selling the September 36 calls on September 7 for 72 cents each.  I bought them back on September 11 for 25 cents.  Also sweet.

Finally, I covered FNV.TO – Franco-Nevada Corp. by selling the September 54 calls for 75 cents, and then repurchased them on September 11 for 25 cents.  Sweet again.

Of course you could argue that I was lucky, and you would be correct. If the shares had continued to increase I would be under water on my covered options position.  I would still own the stock, but I would need to either repurchase the options at a loss to retain my shares, or let my shares be called, in which case I keep the premium, but lose the upside.  Fortunately for me, it worked out perfectly, and I got the best of both worlds: I still own the stocks, and I kept the premium.

By the close on Friday I look like a complete genius, because, for example, Royal Gold was up 3.47% to $91.73, so I’m glad I covered on Wednesday.

I look smart because gold was up (thank you, Big Ben; your drunken money printing is killing America, but it’s great for gold).

On the year, I’m feeling good.  On April 13 my portfolio was up 2.2% for the year.  By the end of June it was up 4.2%.  Then gold started to run any my portfolio (largely in conservative blue chips, with some junior exploration companies, and cast) was up 16.3% at the end of August, 21.5% on September 7, and 26.5% by September 14.  Not exactly doubling my money, but not bad either.

So now what?  Lather, rinse, repeat, I guess.

Options expiry is after the close in a week, on Friday September 21, so if gold stocks are up again on Monday, I may just cover the stocks again.

For example: Royal Gold closed at $91.73; I can sell a September call with a strike price of $92 for $1.10, which is a premium of $1.37.  That means if the stock doesn’t go up by $1.37 in five days, I win (or at least break even).  I would not be surprised to see the Big Boyz punish the option speculators by pushing the balloon under water on Friday, so if the premiums are still there on Monday, I may jump.

Or not; we’ll see.

Thanks for reading, thanks for your excellent comments on the Buy High Sell Higher Forum this week; see you next week.

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