This trade is only for members who entered the original GDX trade!
Gold has been used as a currency for over 5000 years. There is a finite amount of gold in the world, unlike fiat currency, which can be printed by any government that decides to do so.
If you could print your own money, would you do it? I think the answer is pretty obvious.
Governments continue to print money at will, several countries have printed so much money it becomes virtually worthless.
On the other hand, governments can’t print gold…
Historically, in uncertain financial times, gold has provided a safe haven store of value. It protects against inflation and provides a viable way to preserve wealth and purchasing power.
The more dollars that comes into the economy, the less each dollar is worth.
This morning you’ve likely seen the headlines that Republican and Democratic leaders have acknowledged that Congress has reached a $900 billion deal to support the next coronavirus stimulus aid and $1.4 trillion with the funding. The vote is today.
This stimulus package is highly needed, but there’s no doubt it will cause inflation. It won’t happen overnight, but it will happen. The dollars you own will have less purchasing power going forward.
Gold is continuing to look more and more attractive…
There are lots of ways to buy gold, but one of our favorites is to own the gold miners ETF. Gold miners not only increase in value by more than the asset itself but it also benefits from lower fuel prices.
These companies were doing quite well when gold prices were much lower, and fuel prices were much higher. Now they’re in an environment where the price of gold has risen while their fuel costs have fallen. The extra revenue goes straight to the bottom line, giving investors additional leverage to increase gold prices.
For these reasons, I want a long-term position.
Our long-term GDX position currently has a value of $4.60. We opened the position at a price of $2.85, so we are doing quite well, largely thanks to our short-term straddle expiring worthless on Friday.
However, I would like to sell additional short-term premium to cut into that $2.85.
Here we are going to sell the January 34/41 straddle for a price of $.85 against our current long-term position. This will allow us to reduce our current cost basis down to $2.00.
Due to the fact that we own long-term calls, we have zero risk on the top side. If GDX were the blow through our January 41-strike calls, we would make more on our long-term call position than we would lose on our short-term call position.
However, we still have risk on the downside. If GDX were to trade under $34, we would be forced to buy the ETF at that price. But because we receive an $.85 premium for entering the trade, our cost basis would be $33.15. This is a 9% discount from where the stock trades today.
Although straddles tend to be risky, being that we are putting it in front of a long-term position, in this case, it turns out to be a win, win, win scenario.
If GDX trades above $41 by January expiration, we will generate a profit from the position as a whole, so here we win.
If GDX stays between $34 and $41 by January expiration, our straddle will expire worthless, and we will keep the $.85 as profit, so here we also have a win.
If GDX trades below $34 by January expiration, we will be forced to buy the ETF at that price, receiving a cost basis of $33.15, which is a 9% discount compared to where the ETF trades now. Also, a win.