Gold Breaking Out of Trading Range

Have you been paying attention to the price of gold lately? It appears to be breaking out of a trading range and has pushed past resistance at $1135 per ounce. As I write this, spot gold is trading over $1157. The latest push has been ascribed to uncertainty surrounding the financial situation of Greece.

I find this interesting since the last time investors were concerned about the financial crisis, the dollar was allegedly the beneficiary of the uncertainty. I find it hard to believe that this could be the sole reason. While it may be part of the equation, I think that many investors are setting up for the inflation trade.

I, for one, have felt that the Fed will be late in raising interest rates just as they were late in lowering them and raising them the time before. It would be almost guaranteed that they will do little before November elections. You can bet the political pressure is enormous. For this reason, I see inflation as a potentially huge concern in the next several years. Just look at what the price of oil has done lately also, and you will see that the concern is unlikely limited to the Greek situation.

Have you benefitted from the gold trade? I have seen my holdings in Goldcorp go up in the last several weeks although not as much as I would have expected. My Silver Wheaton stock has done very well over the past week since the price of silver is also doing well. You should definitely consider investing in a little gold and silver since I see several more years (maybe up to 10) left in this commodity super cycle.

Until next time--Keep it real!

Make Money with the Silver ETF

Getting convenient access to real assets can be difficult. It can be tough to buy 1000 ounces of silver, store it, and make money with the large spread from a physical dealer. Furthermore, trading in and out is not practical when dealing with physical silver.


Now, I will always advocate holding physical metal but only as a store of value, not as a way to make money. If you want to make money from silver, then you should be trading the silver exchange traded fund (ETF) which has the symbol SLV.

There are several ways to make money using the silver ETF. You can buy SLV when silver is lower in price and sell when silver is higher. This follows the mantra of buy low and sell high. But I want to focus on a different way to make money using SLV that has the potential to produce a monthly income.

I want to focus on the ability to sell covered calls on the silver exchange traded fund. This allows the investor in silver to not only gain some inflation protection, but also to generate some ongoing cash flow while holding a real asset.

Selling a covered call works like this:
Let's say that you have enough money to buy 200 ounces of silver or roughly $3400. Instead of going through the trouble of buying from a dealer, storing the metal, and just watching it sit there, you could purchase 200 shares of SLV through a brokerage account. As of this writing, the silver spot price is $17.26 per ounce and SLV is at $16.94 per share.

You would purchase the shares and could then sell a call option expiring in April at a strike price of $17 per share for $0.61 per share. If SLV closes above $17 in April, those shares will be sold and you would get $17 per share. If not, you keep the shares and can write another call for a May expiration. Either way you would get to keep the option premium.

When the price of silver is down, you can buy some physical silver but while waiting you could be making some money each month using SLV. It is certainly something to consider. Until next time--KEEP IT REAL!

My Thoughts on Natural Gas

To be honest, I have no clue what natural gas will do this year. It's kinda anti-climactic to be summarizing the post in the first sentence but let me tell you what leads me to my profound conclusion and what I am doing about it.

First let's look at the factors favoring an increase in the price of natural gas:

1. It burns cleaner than coal and so is a quick replacement for dirtier fossil fuels while the renewable energy movement takes hold.
2. Continued economic recovery will demand more energy (natural gas is used for electricity generation) and chemical feedstock.
3. High temperatures and air conditioning use during the summer demands more electricity.
4. Shale gas may not get environmental blessings.
5. Analysts think the price will rise.

And now the cons:

1. Improved technology in the collection of gas out of the shale deposits will increase supply.
2. There is already an abundance of natural gas.
3. Liquified natural gas from other countries is just going to add to the supply glut.
4. A renewed contraction in the economy will suppress all energy prices.

It is easy to make a solid argument in either direction. So honestly, I have no clue. But I am still invested in natural gas through my investment in CHK (Chesapeake Energy). How am I managing this? By using protective put options. Option expiration was today (although they only trade on weekdays) and I had some expiring. I bought some new April 25 puts to cover those shares so that I am guaranteed not to get any less than $25 per share.

I actually sold some March 27 calls to help pay for the puts. Plus I have the ability to participate in any rally with the remainder of the shares. So no matter which way the price of natural gas goes, I can feel secure knowing that I am hedged both ways.

Dollar Cost Average Into Silver

Looking back at my last post on gold, I have to admit that I was wrong. Gold has overshot my $1070 target and is trading over $1140 as I write this. Good thing I didn't sell anything. I have been selling some covered calls on the way up and will sell some GG stock at various price points on the way up as well. I am surprised that gold stocks haven't been doing better than they have given the record prices in gold and relative strength of the stock market.

I have a hard time thinking about spending more than $1140 for an ounce of gold. It is not the easiest thing to sell physical gold. I don't have as difficult a time paying for GG or AUY stock, but if you want to own some physical assets, consider silver.

Silver is trading at $18 per ounce. That is a lot easier to swallow especially considering that economic times are tough, and there may not be a lot of extra cash available. It would not be much trouble to spend $50-60 every month or two and pick up a few ounces of silver. With gold being as expensive as it is, silver would be a good alternative and should do well for the same reasons that gold is rising in price.

I think it is worthwhile to purchase some asset that will maintain purchasing power over time. Given the risk of inflation with all of the nearly free money entering the circulation, it is certainly worth considering dollar cost averaging into silver.

Until next time--Keep it REAL!

Gold Trying to Consolidate?

The price of physical gold has hovered around $1050 per ounce for the past 2 weeks. The big question would be, "Where is gold going to go from here?" Of course, it is anybody's guess, but let's look at a few of the factors that might provide some indication as to what the next step might be.

1. Economy not getting markedly better

The economy is still in danger, and I don't see it improving significantly any time in the near future. I suspect there will likely be additional stimulus that might be required if the economy is to grow again. This economic weakness and the potential need for stimulus will continue to put pressure on the dollar which is favorable for gold.

2. Commercial real estate risk

There has been lots of talk about risks in commercial real estate. The general impression is that the commercial real estate market will start seeing increasing levels of default as the consumer continues to reign in spending. Consumer spending may not continue to decrease, but I sure don't see it increasing any time soon. This economic crisis has been more severe than most of us have seen in a lifetime. I am trying to minimize my spending since I know that my taxes and education costs will continue to increase. I will be trying to make my cars last 6 or 7 years instead of replacing them at 4 or 5.

3. Season of the year

This is typically a strong season for gold since the Indian harvest and wedding seasons occur at this time of the year. However, there has been a drought in India this year, and I suspect that farmers will not have a lot of money that they will need to exchange into gold. The high prices will also suppress demand. Normally, you would expect gold to be strong from November through February or March. It might be tough to accomplish this year.

When I look at all of these factors and more, I suspect that some will pull gold up and some down. The net effect is that I see gold consolidating and trading in a range between $1000 (possibly $980) and $1070 for the next several months. Of course, I could be wrong. I am surprised that it has been as stable as it has been over the past few weeks. In the meantime, continue to acquire funds that can be used to invest in gold and gold shares in the future.

Until next time--Keep it REAL!

My Philosophy on Real Estate

Here in central Indiana, it is unlikely that we will ever see the type of crazy appreciation of real estate that was seen on the coasts. There are several reasons for this:

1. It is difficult to attract population growth. We don't have the beach or mountains or any other topographical feature that would be considered desirable.
2. As a result of number 1, it is easy to build new houses. Just buy up a farm field and start building. There are no physical restrictions that make the land especially scarce. In fact, builders over-built so there are currently a glut of homes.
3. Lack of major industry growth. There just aren't a ton of jobs being created. When the United Airlines hub pulled out in the early 2000's, lots of homes went into foreclosure adding to the overbuilding glut. We just don't need any more houses for awhile.

Because I can't count on appreciation, I have to look to cash flow for real estate profits. Even that can be difficult since the ready availablility of housing has kept rents fairly stable. When insurance and property taxes increase, that puts pressure on cash flow.

It has been my hope all along that the majority of my real estate expenses can be paid by tenants. Sure, I will have to come up with the occasional repair bill, but my goal is that at the end of the 30 year fixed mortgage (about the time of retirement), I will have a steady cash flow that can be used to supplement my retirement income.

It may take a year or two to get back all the cash I put in, but after that the investment will more than pay for itself. It can be difficult to take such a long term approach to investing in this day of immediate gratification. But, I would urge you to look to the future in 10, 20, and 30 years when you invest.

Consider that when investing in real assets. Will this company be around in 30 years when looking at the stocks and bonds of that company? It may be hard to say. Will this piece of land still be here in 30 years? Likely. Will this gold coin still be here in 30 years? Likely. And not only that, the land and gold will have some value. So if I can simply get the majority of the expenses paid over the 30 years of being a landlord, I will end up with a property which throws off cash or could be sold. I like the thought of that.

Until next time--Keep it REAL!

Turning On the Heat

When my daughter came to me wearing a knit cap and scarf two days ago asking why it was so cold in the house, I broke down and turned on the heat. I had to agree that it felt kind of chilly. It turned out to be 62 degrees. It is a balmy 69 degrees now.

Our heat is natural gas, and I always hate turning it on since I know that my gas bill will skyrocket in the next month and cost as much as a small car payment for the next 6 months. Have you noticed that the price of natural gas has gone up almost 25% in the past month? Just in time for winter.

Have You Hedged Your Living Expenses?

I suppose that is OK that natural gas is rising. Even though my heating bill will go up along with it, I will benefit more from a higher price since I own natural gas. No, I don't store it. I own a natural gas company's stock, Chesapeake Energy (symbol CHK). Every time natural gas prices go up, CHK tends to go up as well. It usually goes up more. In fact, I have some shares that I bought at $14.98 in March. Now, CHK is nearing $30 per share. Over the past month, CHK is up about 25% as well.

So, my question is: How have you hedged your living expenses? Do you drive a lot and use gasoline? Buy Exxon Mobil (XOM). Worried about food costs? Buy Kellogg (K) or Pepsi (PEP). Health care costs got you down? Buy stocks in the health sector that are making money hand over fist. Look at what expenses you have that might be impacted by inflation. Then look at which companies might benefit and purchase their stock. It is a lot easier to do that than keeping a grain silo or oil tank in your backyard. Plus you still benefit from increased prices.

So, don't get sad that you have to turn on the heat. Smile and think about all your neighbors turning on their heat and becoming your customers.

Until next time--Keep it REAL!