I’m Back – Thoughts on Gold and New York

by JDH on November 15, 2014

I’m back from my trip last weekend to New York City.  Apologies to MetalMeister and the rest of my readers for the brevity of my Live From New York post last weekend.  Last weekend I decided to travel light.  I didn’t bring a laptop, just my iPad, so I didn’t have the desire to tap out a long report one letter at a tip.  I’ll give you more volume today.

First my thoughts on New York, and then my thoughts on the market (I’ve titled each section, so feel free to skip to what you want to read).

New York City

Mrs. JDH’s birthday was last weekend, so to celebrate we flew from Toronto to LaGuardia at the crack of dawn on Friday morning.  On Friday we hit the ground running.  We dropped our bags at the hotel, and hit the ground running, starting with the shopping district.  She shopped, I held the bags.

Friday night we had dinner and saw Kathleen Madigan at the City Winery.  Good spot, good food.

Saturday we took the subway to Wall Street and saw Ground Zero.  We visited shortly after Hurricane Sandy, and the repairs appear to be complete.  Unlike our last visit I saw no evidence of the hurricane.  The two building footprints that are now water features at the World Trade Centre are impressive.  The crowds were huge so we did not tour the new museum.

On Saturday and Sunday, walking through the streets of New York, and Central Park (which we walked from the top to the bottom), the crowds were huge.  Wall to wall people.

My observation: for people who can afford to travel to and shop in New York City, all is good.  The economy is booming.  I suspect, however, that we are in a “bi-modal” world, where the rich are very rich, and the poor are poor, and there is no middle class.  That’s my key observation.  The middle class is disappearing.

Macy’s, a middle class department store, has just finished spending $400 million on a renovation to their store on 34th Avenue.  Why?  To attract luxury shoppers.  They have a floor or two that have less expensive goods, but the focus of the store is shifting to where the money is: the rich people.

Long term I worry about the implications for the economy in general.  If you don’t have a large middle class, who will drive the economy?  Who will be the consumers?  The workers?

Alas, there is only one solution: the government has to stop supporting the rich, and let the free market take over, but that’s not going to happen anytime soon.  Whether the President’s name is Bush or Obama, the approach is the same: Low interest rates so the banker-class can invest free money to earn a profit, while the poor can’t access that same credit, and they fall behind.

We visited the Federal Reserve Museum, and it was interesting to watch the propaganda about strong money, from the institution that has dropped the value of US currency by 98% since its inception.  Sad times for middle class.

Gold and the Markets

As I reported two weeks ago in My Response to the Crash in Gold, I sold all of my juniors, I bought some GLD puts, but 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: some of them pay a dividend, and more importantly I expect them to be higher in the future, so I don’t want to be completely out of the market.

For my blue chip stocks, I’m doing covered writes to mitigate what may be losses.  I sell short term call options against the stocks I own.  As I reported two weeks ago, on October 22 I sold the November 78 calls on Royal Gold for $2.15.  Two weeks ago, I bought them back for 21 cents.  During that period the stock dropped from $76 to $65 so I lost $11, mitigated by the $2 I made on the options.

RGL-November14-2014

By November 12 Royal Gold was back to the $75 level, so my $11 loss was only $1, so with my $2 premium I was up, so I did it again.  On November 12 I sold the November 76 calls for $1.50.

I’m betting that my the close of business on the third Friday in November, which is next Friday (November 21), Royal Gold will be trading below $76, and the options will expire worthless.

That looked like a good bet on Thursday with the stock down, but on Friday it was up $3, or 4%, to close at $76.51, so the bet is not looking great at the moment.  We’ll see what happens this week.

I don’t expect the stock to continue to increase $3 every day.  I expect it to stay around these levels, so if by next Friday it’s still at $76.51, no problem, I’ll buy the options back for around 51 cents (since on expiry day the time premium will have eroded), and I’ll still be up a $1 on the deal.

No worries.

My hypothesis is that we may very well still see $1,000 gold before this correction is over, so I’ll wait on the sidelines until then.  I have one toe in the water, but I am currently 53% in cash, and that’s fine with me.

That’s the report for today.  Thanks for reading.  More next week.