Bored, But Should I Be Terrified?

by JDH on July 20, 2013

We have just completed the hottest week of the year, with temperatures routinely in the 35 Celsius range this past week.  For those who don’t speak Celsius, our backyard outdoor swimming pool, with the heater turned off, on Friday afternoon measured 91 degrees Fahrenheit.  That’s warm.  In weather like this we tend to move slowly, and suffer through the dog days of summer.

The markets are in the dog days, with Dow treading the range of 15,420 to just over 15,580 this week, a relatively narrow range, before closing for the week at 15,544.  Yawn.

Gold played the same game, with the low and the high for the week both reached on Wednesday, where gold moved in the range of $1,270 to just under $1,300.  Ho hum.

I did my standard “sell covered calls against my gold stocks” routine again this month, but I waited until this week to do it, to minimize the risk of the market moving quickly against me.  The calls I sold against AEM.TO – Agnico-Eagle Mines Ltd. expired worthless, so that was good.

I only did slightly better than break even on my calls on SLW.TO – Silver Wheaton Corp. as the stock moved up slightly during the week.  However, I still made money, due to the erosion of the time premiums, which is of course the entire point.

However, I was not so lucky on RGL.TO – Royal Gold Inc. and G.TO – Goldcorp Inc. as I had to buy back the options for more than I sold them for, incurring a “loss” on the transaction.  The biggest “loss” was Royal Gold; I sold the options for around 20 cents, but bought them back for 70 cents, for a 50 cent loss.  Fortunately for me, the stock was trading around $44 on Monday when I covered, and by the close on Friday was at $47.36, so while I lost 50 cents on the options, I made over $3 on the increase on the stock price.  I’ll take it.

I also see that this week various dividend payments were deposited in my account, including 17 cents from Royal Gold.  That’s why I don’t want to sell the stocks: I can earn dividend income, and hopefully increase my returns with covered writing, while I ‘sit tight” and wait for the market to recover.

So why did Royal and the other gold stocks bounce up this week?  It could be that we are nearing the end of the paper gold play.  As I have opined in the past, it is conceivable that with all the shorts out there, the holders needed to depress the paper price to cover their shorts.  Alas, at some point you need physical to deliver, and so by depressing the paper price the hope was that they could purchase the physical to leave themselves covered.  Interestingly, this week, JPMorgan’s eligible gold dropped 66% in one day, leaving them with the lowest level in years.

If you are the custodian of the gold, and your customer wants to take delivery of the gold, and you don’t have the gold, what happens?

The gold price explodes upwards.  That would be terrifying, if you don’t own gold and you need it to cover.

I’m not making a prediction, I’m just making idle chatter to while away the dog days of summer.

Enjoy, and see you next week.