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There are many different investment vehicles one can use to invest in gold but the key aspects that we
as investors and traders must always look for are the vehicles’ relationship and correlation with gold prices, and how much that correlation is or isn’t leveraged to the gold price.
Ways to Use Leverage to Maximize Gold Returns
a) Buying on Margin
A simple solution to achieve this is by using margin, i.e. borrow money and buy twice as much GLD and you will get approximately twice the return than you would have earned without buying on margin. Not all investors are comfortable with margin, however, because with gold being so volatile one could be caught out and face margin calls.
b) Buying Gold Stocks
One of the most popular methods for those looking to invest in gold with additional leverage is gold stocks although we don’t think this is the best way. It is not that there aren’t some gold stocks that are well worth investing in, as there certainly are some fantastic opportunities and a lot of money to be made in gold stocks, from the heavyweight miners to the junior resource start-ups. It is just that gold stocks do not score highly in one of the main aspects we look for – correlation to gold prices.
While it is true, in general, that as gold prices have been rising gold stocks have been making great gains, we feel there are simply too many other external factors that have little or nothing to do with the price of gold and yet affect the investment, diluting gold stock’s correlation to the gold price. Such external factors are things like:
a) increasing costs,
b) geo-political unrest in the region they are mining in,
c) foreign exchange fluctuations and
d) changes in management.
The junior resource companies are even less correlated than the miners with their stock prices moving, not on the gold price today or in six months from now, but more on:
a) whether or not they find any gold,
b) how much gold they find,
c) where they find it,
d) what grade the resource is and
e) whether the project will be feasible to mine in many years to come.
When looking at the leverage of gold stocks relative to gold prices, while they do exert some leverage and regularly outperform the yellow metal, the extent to which they do varies considerably and it is hard to calculate how much leverage a stock will give you due to the external factors detailed above.
c) Buying Options
As such, in our quest for the best gold investment vehicle – one that exerts direct undiluted correlated returns to the gold price with added leverage that is quantifiable to a reasonable accuracy – we think that options are the best choice because options contracts are:
a) directly linked and correlated to gold, without the hassle of the external factors that often hamper gold stocks
b) not only a leveraged product but one that can be tailored to suit ones degree of leverage preference with the right combination of contracts
c) risky but an investor can choose how much risk they wish to take on, and in some cases owning options results in less risk than owning gold stocks.
[d) Buying Gold Mining Company Warrants
[See details in the Related Articles below.]Conclusion
In our quest for the best gold investment vehicle – one that exerts direct undiluted correlated returns to the gold price with added leverage that is quantifiable to a reasonable accuracy – we think that options are the best choice.
The comments above are edited ([ ]) and abridged (…) excerpts from the original article by Sam Kirtley
Related Articles From the munKNEE Vault:
1. Stock Warrants: Do You Have a “Ferrari” In Your Portfolio?
Rarely do I see others writing about stock warrants so I was delighted when Marin Katusa went into detail describing the benefits, as well as the potential risk factors, with warrants as outlined below.
2. What’s the Difference Between Warrants, Options & LEAPS?
Investors are always looking for ways to maximize their gains and warrants, options and LEAPS are a good way to do just that. These investment vehicles are very similar to each other except for issue of time. [Let me explain.]
3. Gold & Silver Warrants: What are They? Why Own Them? How are They Bought & Sold?
With all the interest in physical gold, silver and other commodities these days, and the large/mid-cap companies who mine the metals and the juniors who are exploring for them, it begs the question: “Why is no one writing about the merits of investing in the long-term warrants associated with a few of those companies?” Merits? Absolutely! Here is a primer on virtually all that you need to know about warrants and how to invest in them for major profits.
4. Warrants “Don’t Get No Respect” But They Should – Here’s Why
This article offers a tutorial on warrants as an underused investment vehicle, disabuses myths about warrants, shares the names of some warrants that warrant attention and makes the case for adding warrants to one’s portfolio.
5. Capture Some Incredible Potential Gains By Investing In Stock Warrants
If you don’t understand stock warrants, you are not alone. Very few of the professional newsletter writers and analysts understand them so why should you? Allow me to give you a brief education on stock warrants in the following paragraphs and tell you exactly why you need this information.
Very few investors know about the potential benefits via the additional leverage that warrants can offer but they are substantial if you follow the 4 rules I present in the article below.
7. Increase Your Returns With Certain Gold Mining Company Warrants – Here’s How
The warrant investor needs to be aware that owning the stock outright is the conservative approach. When using the warrant, the basic common stock MUST appreciate to a certain level BEFORE the warrant’s risk/reward basis becomes better than an outright stock purchase…
8. Interested in Buying Gold or Silver Mining Company Warrants? Here’s How
Buying and selling warrants associated with commodity-related companies (including those of gold and silver miners) can be very confusing if you are not aware of the unique information required to do so and understand just how to go about it. Below you will find all the information you need to know on the subject.
With a tsunami of interest in the future prospects of gold and silver mining companies (and their stock prices as a result) I have been asked to publish an updated version of my one-of-a-kind proprietary index of commodity-related companies with long-term warrants (CCWI) and its sub-category of just gold and silver companies with long-term warrants (GSWI). This article gives you some insights into the ‘secret world’ of warrants and slices and dices the make-up of both indices identifying the constituents of each for your edification.
10. Exposed! The “Unknown” World of Gold, Silver and Commodity-related Company Warrants
Warrants have been the best kept ‘secret’ of the investment world until now. After all, when was the last time you read an article on warrants or had your financial advisor broach the subject? Pay attention to the particulars provided in this article, prepare with proper due diligence and enjoy the prospects of future prosperity that a basket of long-term warrants can provide.
11. Gold & Silver Company Warrants: Which, When, Why, and How to Buy Them
With all the interest in physical gold, silver and other commodities these days, and the large/mid-cap companies who mine the metals and the juniors who are exploring for them, it begs the question: “Why has no one written about the 91% returns and the 60% leverage generated by the long-term warrants offered by a select few miners and royalty companies in 2010?” The information in this article and the links to a variety of resources will change all that and make you ready and able to reap the benefits from investing in this much misunderstood asset class.
Talk about a small world we live and invest in! The galaxy of warrants trading on the TSX/TSXV consists of only 167 planets (i.e. constituents) in total of which only 40 are stars associated with 34 commodity-related stocks that have sufficient brightness (i.e. 24+ months duration) to warrant (the pun is intended!) the attention of earthly investors. My telescope has identified each of them and below I provide you with the particulars of each so you will be in a position to do your due diligence and begin to prosper above and beyond what you could achieve investing in the commodities and/or stocks themselves.
13. Look! Gold and Silver Company Warrants Dramatically Outperform Gold Bullion and Gold Miner Stocks
The world of warrants is the best kept investment secret around. No one seems to realize that long-term (LT) gold and silver warrants were up 140% and 92%, respectively, in 2009 and 2010 in U. S. dollar terms. Investment and financial writers go on and on about gold being such a great investment these days but gold was up “only” 24% and 30%, respectively, during the same time frame. Isn’t it time investors, analysts and commentators conveyed the truth, the whole truth and nothing but the truth when it comes to investing in gold bullion and gold-related securities? This article will do just that!
14. Forget Gold Bullion! Those in the Know Own Silver & Gold Miner Warrants
The world of warrants is the undiscovered constellation in the universe of securities. Long term (LT) warrants shone brightly in 2009 – up 242% in U. S. dollar terms – and were up a further 91% in U.S. dollar terms in 2010. The warrants world consists of only 135 stars (i.e. constituents) of which only 32 are associated with 29 commodity-related stocks that have sufficient brightness (i.e. 24+ months duration) to warrant (the pun is intended!) the attention of earthly investors.
15. Options Are a Gold Bull’s Better Play Than Owning High Beta Miners – Here’s Why
Whilst it is true, more often than not, that mining stocks move in the same direction as gold [and historically outperform that of the physical metal based on their better beta statistics] there are periods where this relationship does not hold. That is one of the reasons we currently have no interest in trading or investing in mining stocks. Why form a bullish view on gold and buy mining stocks based on this view, only to see gold rise and mining stocks fall? [Instead,]… our preferred strategy to optimize and maximize potential profits… is using options that are directed based on the price of gold with no other factors influencing their performance. [Let us explain why.]