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!

Buying Gold at Record Prices

I recent wrote an article at HubPages entitled, Buying Gold at the Peak.  Essentially, I looked at what would happen if someone had begun in 1980 buying gold paying $1000 each January to buy gold.  I assumed that our investor paid $850 per ounce in January 1980 (buying at the peak) and then spent the next 31 years through 2010 spending $1000 each January to buy gold.

I then took that same individual and had them purchase the S&P 500 index using $1000 each January.  So two investors each spending $1000 each year from 1980 through 2010.  You might think that the investor buying stocks would have made a killing compared to someone buying gold.  I certainly thought that they might do better.

But in reality the difference was only about 2% total in favor of stocks.  I was really surprised given that gold was in a terrible bear market and stocks had the greatest bull run in history.

I mentioned this on another blog in the comments (did not spam with a link) and was criticized for not including dividends of the S&P 500.  It is a legitimate concern for sure but one that is not correct.  For if you include dividends (which are currently 2%), you need to include inflation as well and figure out the reduced purchasing power of the dollar. 

It turns out that the dividends and inflation cancel each other out and doing a simple calculation as I described is in fact legitimate, and the results are valid.  When I added in dividends and then adjusted for inflation, the results were incredibly close.  The bottom line is that gold does produce income but protects purchasing power.  Stocks produce income to make up for the loss of purchasing power.

It really didn't matter if you invested in gold or stocks, you still ended up in the same place with the same wealth at the end of 31 years.  The key was investing on a consistent basis and buying whether the price was high or low.  So don't be afraid to start investing in gold now.  Or don't be afraid to invest in stocks now.  Just keep a long term perspective.

Until next time--KEEP IT REAL!

A New Investment in Natural Gas

I reestablished a position in natural gas yesterday by buying shares in Chesapeake Energy (CHK) as well as buying October 25 puts.  My plan is to wait until next month and sell covered calls if the stock is up or buy additional shares if the price is down.  You may be wondering about the rationale of such a strategy, but think about it this way. 

If the price of the shares is down to $22 or $21 per share, I have an automatic profit on those shares since I have purchased the puts for October and can sell those shares for $25.  Granted the puts cost some money, but I will sell some covered calls to ultimately pay some (if not all) the cost of those puts. 

If the stock is up from my purchase price, then that is also good.  I can sell covered calls at a higher strike, get some immediate cash and then additional profit in the form of capital gains.  I think it will turn out to be a good trade.

There are several factors that might impact the price of natural gas over the next several months which will have some bearing on the price of CHK.  Natural gas supplies are about 15% higher than normal for this time of year which would tend to push prices lower.  Hurricane season in the Gulf of Mexico could push prices higher if a lot of damage is done.  A warm summer could push prices higher since electricity generation needed for air conditioning is often provided by natural gas generating plants.

Truthfully, however, I have no idea what will be happening to prices this summer.  That is why I have hedged my position with puts and will also be averaging into a larger position over the next few months.  Over time, I believe that inflation and demand will eventually bring down the over supply but that could be a year or several away.

Nonetheless, I still like having exposure to real assets.  My house is warmed by natural gas as is my water year round.  If my bills start to rise, I want to be able to make money in the process.

Until next time--Keep it REAL!

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!