Monday, April 18, 2011

Let's Get Physical

Here is an interesting story about the University of Texas Investment Management Co. taking physical delivery of gold.  This endowment fund is the second largest following Harvard University.  Obviously from reading the article, I get the sense that some very smart people are concerned that there may be difficulty in getting physical gold delivered due to the fact that futures contracts that are traded represent so much more gold than actually exists.

This is consistent with information that Eric Sprott shared back in January about having difficulty getting physical delivery of silver for his hedge fund.  It would seem that there just might be a pattern developing here, and it is one that investors in the precious metals would be wise to heed.

No Substitute for Physical

If you really want to own real assets, then there just is no substitute for physical possession.  Any paper derivative is simply not worth the paper that it is printed on.  That is the big problem with the fiat currencies today and what is driving the price of precious metals to all time highs.  Confidence in the paper system has declined.  Investors are demanding to hold something tangible in their hands.

That is not to say that money can't be made using paper.  Trading in the gold and silver ETFs or mining shares is a great way to move into and out of positions quickly and make some additional cash by trading.  However, at the end of the day, you have to realize that you really don't own anything of substance.  Just ask the shareholders of any of the recently bankrupt companies what they got out of any bailouts.  Then decide for yourself--paper or physical.

Until next time--KEEP IT REAL!

Friday, April 8, 2011

Outstanding Week for Gold and Silver

What an amazing week this has been for gold and silver.  Gold has hit record highs heading into the weekend and the strength of silver has lifted it solidly above $40 per share to close within pennies of $41.  The higher gold gets, the more that talk about bubbles begins to surface.  But I found this interesting commentary on the Kitco website which is where I go for all my precious metal related information.

I like the information presented that would argue against a bubble especially the comments about the lack of a price spike in terms of standard deviations.  These are the types of moves that mean a market is really stretched pretty thin and will likely snap back.  We are nowhere near that now.  Granted gold could easily settle into the summer since there is a seasonal aspect to gold.  But I think that may be less important with investment demand versus social demand.

I also think the comments about the gold as a percentage of total financial assets is a telling graphic as well.  There is clearly not the widespread interest that there was in 1980.  So until we see that number crossing 2%, we won't, in my opinion, be coming close to bubble territory.  Two percent is probably what might even be considered reasonable in terms of asset allocation.  There are many investors who have zero allocated to gold.

If you haven't invested in gold or silver, you may want to get some exposure.  You could do this quickly and easily with the precious metal ETFs such as GLD or SLV.  This is probably what I would do.  I would also look at using protective puts to lock in profits as they hit record highs along with the underlying bullion.  Also, feel free to learn more about gold by reading books from Amazon such as the one below.

Thursday, January 27, 2011

Disconnect Between Paper Silver and Physical Silver?

I ran across these comments from Eric Sprott, Chief Investment Officer of Sprott Asset Management regarding the illiquidity in physical silver:

As one who is invested in real assets and am involved in the silver market through ounces of silver and a stock investment in Silver Wheaton, I found the comments very interesting.  Honestly, I am not sure what to make of them.  I am sure that with all of the silver exchange traded funds coming to market, there is a lot of increased investment demand for physical silver.

At the same time, I am concerned that money entering the silver market through ETFs can leave just as quickly causing these funds to dump physical silver on the market and exacerbating volatility in the silver price.  We just watched silver climb over 80% in 2010 to three decade highs at over $30 per ounce.  It has since pulled back, and I am worried that the fall could be worse as investors flee the ETF market.  I am planning to look into the potential implications and see if there is some evidence regarding an increase in volatility as a result.  I will keep you all posted.  In the meantime, I will be treading carefully in silver and hedge my stock positions.

Until next time--KEEP IT REAL!

Tuesday, December 14, 2010

Timing the Real Estate Market

I read an interesting article the other day making the case that now was a great time to invest in real estate, and I must say that I agree.  The premise was that real estate had decreased about 30% from the peak in many locations and that the median price had stabilized and started to increase ever so slightly.  More importantly was that interest rates were at the lowest levels we would likely see for several more decades.

Click here to read the full article.

I have recently been considering the question of investing in real estate with a retired relative of mine who will likely require about 20 years worth of income.  Currently, this individual has a fair amount of cash in a savings account.  Needless to say, that savings account does not earn a lot of income and would be pretty useless as an income source to supplement social security and pension income.

Rather than allow those savings to languish and get eaten away by inflation while providing essentially zero return, I suggest investing that cash in income producing real estate.  The cash could be used to pay for the majority of a duplex which has the potential of generating about $1000 per month of spendable income.  Initially, that income could be used to create a fund for repairs for the duplex and pay off any borrowed funds used to complete the purchase.  After a few years, the money could then be used to supplement income or to purchase additional real estate if not needed for living expenses.

I am amazed at the amount of cash sitting on the sidelines in savings and money market accounts that will barely keep pace with inflation if even that.  It seems to make much more sense to at least purchase real estate with cash and enjoy the cash flow from the property.  It really doesn't matter if the property appreciates.  The point is that the income produced is much more than could possibly be gained in this period of low interest rates.  In this case, there is no need for timing the real estate market.  Now is the time. 

Until next time--KEEP IT REAL!

Monday, November 1, 2010

Silver at Decade Highs--Nearing $25 per Ounce

Have you noticed the price of silver lately?  It seems to be stealthily increasing and over the past month has markedly outperformed the price of gold.  I have especially noticed this because the price of Silver Wheaton stock (symbol SLW) which I own in my retirement account has gone nuts and has outperformed Goldcorp stock (symbol GG) by a wide margin.

To be perfectly honest, I haven't been paying much attention to the silver price and didn't even realize that it was approach the psychologically important $25 per ounce level.  I had simply noticed that SLW was increasing dramatically.  In fact, I have become worried that the stock has gotten ahead of itself so in the past week I bought some puts to protect my paper profits.

Silver is typically more volatile than gold so when the price of these precious metals begins to decline, I would expect silver to decline much more rapidly.  I don't know when that will occur but wanted to be able to protect myself with puts.  I also plan on allowing many of the calls that I have sold on SLW to be called out.  This will decrease my exposure to the silver price since I think it might be getting a little high in the short term.  Longer term I would expect that the fundamentals would argue for a higher silver and gold price.  But I want to take some profits now and buy back in again later.

I did this very effectively with Akamai stock (AKAM) using the collars that I trade.  I had purchased AKAM at various prices over the summer and had a net basis of $40 per share.  As it ran up, I decided to take the opportunity to purchase some $50 puts for October and lock in those profits.  As it turns out, AKAM was well below $50 per share so my puts were exercised allowing me $10 profit per share.  Then, I bought back the stock at two different price points below $50, namely $46 and $48.82.  The end result is that I now have the same number of shares that I owned before along with some extra cash.  I own puts on the stock and have sold some covered calls creating a collar.

My current basis in AKAM is $47.94 with the opportunity to be called out in 3 weeks at an average price of $50.25.  That would make for a one month profit of 4.8% should AKAM rise just a little farther to $52.50.  If not, I will sell some December calls to lower my basis some more.

The point is that I am doing the same thing with my SLW stock.  By owning the stock, I gain exposure to the silver price but have the flexibility of easily managing options to take advantage of the price swings and lock in profit using puts and collars.  My current basis in SLW is $24.15 per share overall with an average call strike price of $27.31 provided SLW is above $29 per share 3 weeks from now.  If not, I will sell calls on the shares I have left although I would expect some to get called out.

Anyway, this is just one example of using stocks to gain exposure to real assets.  I suspect real assets and the companies that deal in them will be a profitable investment for the next several years.  Until next time--KEEP IT REAL!

Tuesday, September 7, 2010

Gold Season Has Started

I have written lots of articles on gold since I believe that everyone should have at least some gold exposure.  Now, I wouldn't call myself a gold bug, per se.  I would be OK if gold were to drop to $300 an ounce or even less since that means that all of my other investments would be going up in value.  It means that the dollar would be strong like in the 1990's and America would be enjoying prosperity.  Oil would probably be in the neighborhood of $30 a barrel or less so my monthly expenses for heating with natural gas and transportation would be less.  Food prices would decline since transportation costs would go down.  So, I could really care less whether the price of gold goes up or down since I will benefit either way.

But, I believe that gold prices will go up.  I also believe that they will be increasing to new nominal highs before the end of the year.  I don't have a specific target price since it really doesn't matter.  I am simply positioned such that gold serves as a hedge to my portfolio.  About one-third of my retirement portfolio is in Goldcorp stock (NYSE: GG).  It has been by far my best performing stock over the last several years.  This year hasn't been quite as good but it is still positive.  I create equity collars using the stock and try to sell a little bit when the stock spikes and buy back some when it falls.  I don't always hit the highs and the lows but try to trade around a core position in the stock.

I believe that gold prices will go up because of the seasonality of gold.  There has been a great deal of writing on gold's seasonality.  As I write this on the day after Labor Day, the price of gold is up over $11 per ounce and is clearly within striking distance of new nominal highs.  And yet few people outside the financial world are talking about gold as an investment.  I remember when the Nasdaq was making new highs, people up and down the hallway at work were constantly talking about tech stocks and getting in on IPOs.  And yet I am hearing nothing about gold or silver, which is one of the reasons that I don't believe they are in bubble territory yet.  I think that a bubble will occur for sure.  But I just don't think now is the time.  I think there are several more years yet to go before we get through this portion of Kondratiev's cycle.

So, I am just simply asking you to pay attention to the price of gold over the next several months and see what happens.  You don't have to invest if you don't want to.  You can continue to use the excuses that gold is a relic, that it pays no dividends, that you can't really buy anything with it, or whatever excuse you want to use.  Just know that I do hold some physical gold and silver and have stock in Goldcorp and Silver Wheaton but that I still hedge my stocks with protective puts and sell some covered calls against them.  Know that I try to buy a little more during the off season and sell a bit when the prices rise.  And think to yourself whether or not there may actually be something to investing in assets that protect wealth from the eroding purchasing power of fiat currency.  Until next time--KEEP IT REAL!

Monday, August 9, 2010

Natural Gas Investing Update

If you have been reading this blog from time to time, I mentioned that I made an investment in natural gas by purchasing shares of Chesapeake Energy (CHK). I ended up buying these shares at $25.40 but also purchased some October 25 puts.

Well, it turns out that I didn't sell any covered calls since the account in which I hold the shares is a margin account and selling calls affects my ability to borrow against them. Unfortunately, I needed to borrow a little to manage some problems with cash flow over the past few months. (When one of your teens takes out the quarter panels of two different cars in your own driveway, you have a cash flow problem.)

However, I did manage to purchase a few additional shares today at $22.07. Since I purchased the puts for $2.45 and can sell those shares for $25, I will make a profit of $0.48 per share in a stock that dropped 10%. Isn't that great! I also purchased some January 2011 puts at the $21 strike to protect the shares that I picked up today. I am hoping that next month I can sell a few calls since I believe the cash flow issue will be improved.

As mentioned in the earlier post, I had no idea which way natural gas prices were headed. It turns out that the hurricane season has been fairly mild so far. Regardless, I did have myself hedged such that I have been able to make a slight profit rather than a loss. It sure makes it easier to sleep at night knowing that I can't lose everything.

It is possible to use the above principles for any stock trade. Simply buy a partial position in a stock and the protective puts to go along with it. Then if the stock drops significantly, you can purchase additional shares that will sell at the strike price of the put making a profit. Of course, be sure to purchase additional puts to protect those other shares in case the stock continues to fall in price. Until next time--KEEP IT REAL!

Check Out These Products From Amazon!