My Response to the Crash in Gold

by JDH on November 1, 2014

Well, that was fun.  On Halloween gold was down almost 5% for the week, down 3.4% for the month, and fell to its lowest level since July 2010.  You may interpret this development in one of two ways:

Gold-TripleBottom-Oct2014

This is a triple bottom, and represents very solid support, so you should start aggressively buying, or, if this triple bottom support doesn’t hold, it’s “here comes $1,000”.

My response, as I noted two weeks ago in my post on why I started selling this week, was to do more selling this week.  On Wednesday I sold all of my junior gold stocks.  All of them.  I only hold the majors, for reasons I will review.  I am now over 50% in cash.

Why not sell the majors?

I continue to hold the majors, including RGL.TO – Royal Gold Inc., FNV.TO – Franco-Nevada Corp., and SLW.TO – Silver Wheaton Corp..  I hold them for two reasons:

First, I believe that gold stocks will be significantly higher in the future, and since I’m not smart enough to pick the exact bottom, I don’t want to be in a position where I end up having to buy back my holdings at a greatly inflated price.  If we have a crash I’ll have cash to buy more.  For now, I hold the majors.

Second, some of them, like Royal Gold, pay a dividend.

Third, to mitigate my losses, I do covered writes on the majors, which is not possible on the juniors.

For example, on October 22 I sold the November 78 calls on Royal Gold for $2.15.  On Friday, I bought them back for 21 cents.  The stock has dropped from $76 to $65 during that time period, so I’ve lost a massive $11.  However, the $2 I recovered on the options mitigates my losses.  I will wait until we have a good day or two on the stock, and then cover again, and keep the premium.

Yes, I realize that the correct option was to sell everything on October 22, but since I full expect Royal Gold to be a $100 stock at some point in the future, I only have “paper” losses.  With a long enough time horizon, temporary fluctuations are not an issue.

As added insurance, on October 22 I also bought GLD puts (January 110 strike price) for 82 cents.  I sold them on Friday for $2.83.  So, that’s another $2 towards my losses on the gold stocks.  Again, if we have a few good days on the gold price, I may buy more puts as insurance.  We shall see.

For now, I hold my cash, and wait for the next shoe to drop.

Thanks for reading.  See you next week.