Sunday , 21 July 2024

Goldbug Exclusive: Put Your Money Where Your Mouth Is & Potentially Earn a +10-bagger Return! Here’s How

So says Macro Investor in edited excerpts from a post* on Seeking Alpha entitled A High Risk/High Reward Play For Gold In 2013. 

This article is presented by (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say, in part:

For gold to go up, I feel that…inflation expectations have to be high (this is not the case…); the US Dollar has to weaken against other currencies (it is not likely to happen…) and the demand for physical gold has to strengthen (this is unlikely. In fact, demand may drop…)

Let’s examine some of the gold ETFs.

UGLD Chart

As the chart above shows:

  • The core gold ETF, SPDR Gold Trust ETF (GLD), which tries to reflect the price of gold bullion, is up about 4% over the past year. However, over the past 5 years the ETF has almost doubled.
  • The 2x leveraged ETF pair, the ProShares Ultra Gold ETF (UGL) and the ProShares Ultrashort Gold ETF (GLL), try to replicate on a daily basis 2x or -2x the performance of the gold bullion….[and] UGL is up about 2% for the year, while GLL is down about 17%….
  • The 3x leveraged ETF pair, the VelocityShares 3x Long Gold ETN (UGLD) and the VelocityShares 3x Inverse Gold ETN (DGLD)…[with] UGLD flat and DGLD down 24% in the past year. This is to be expected as these 3x ETFs are leveraged even more than the 2x ETFs, so are expected to erode faster.

So, how can gold investors profit from the above in 2013? To me, the best way is to buy puts on GLL. [As the chart below shows,] over the past 5 years, as GLD has almost doubled, GLL has lost about 75%. This means investors who shorted GLL would have quadrupled their investment. [For a similar article on investing in inverse puts (on silver) by the same author read:  If You Think Silver Is Going To Increase In 2013 Here’s How to Best Maximize Your Return]

GLD Chart

Expected Profit From Buying This Put

The July 2013 expiration 58 strike puts on GLL are trading at $2.80/3.40 (bid/ask)….[To determine] what the expected profit of buying these puts [would be]…I:

  • assumed that GLD stays flat in 2013 and its daily volatility remains unchanged,
  • created a set of 140 daily returns for GLD, and 140 daily returns for GLL leveraged at -2x for GLD,
  • estimated the price of GLL and that of the July 2013 strike 58 put on GLL at the end of the 140 daily returns,
  • assumed that the cost to buy the put is midway between bid/ask, or $3.10.

Over the 5000 trials, the 95% confidence interval for the expected return of buying this put is:

  • 53-67% return if GLD were to appreciate 0% in 2013
  • 97-110% return if GLD were to appreciate 5% in 2013
  • 153-174% return if GLD were to appreciate 10% in 2013

Of course, investors are risking 100% downside as well, as the put may expire worthless.

Potential Losses From Buying This Put

If GLD were to decline by:

  • 5% the put would still return 3-15% with 95% confidence,
  • 10% the put would end in a loss of 8-18%,
  • 15% the put would end in a loss of 40-50%,
  • 20% the put would end in a loss of 65-70% and were GLD to decline by
  • 25% the put would be down by more than 80%.

When it comes to buying puts, my rule of thumb is that unless there is an upside to buying the put compared to the underlying, I wouldn’t even buy the put. By that logic, investors who believe that there is a more than 10% downside to the price of gold in 2013 would be better served to consider strategies involving the underlying GLD ETF itself.


I think it is safe to assume that a 50%+ return with this put is not unreasonable, if investors believe that gold will at least stay flat in 2013. [Remember, too, that if an investor were to buy such a put as described above, and gold was to go up by just 10% in 2013, the return would by somewhere between 153% and 174% with 95% confidence.] 

Disclaimer: The above is not meant as investment advice….Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice.


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golden dollar

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