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The Investment U Roving Reporter: Day 4 – Conference Report:
“Golden Opportunities and Your Options”
by Dr. Scott Brown, Education Director
Monday, March 30, 2009: Issue #967
It’s our last day here at the Investment U Conference in St. Petersburg, and it seems we’ve saved the best for last. The weather has taken a turn for the better – if that’s possible – and our experts have cranked it up to high gear and have dug into some of the most controversial topics Investment U has covered recently.
Like investing in gold.
Gold has been an incredibly hot topic over the past few months. On one side, it looks cheap from an inflationary perspective, and on the other, overpriced. Our own Louis Basenese even suggesting that we should consider shorting gold. The debate has ranged on our message boards pro and con…
But regardless of its short-term movement, we recommend holding 5% of any portfolio in precious metals – like gold. So what is the best way to accomplish this? We found a number of ways to do just that.
The Best Ways for Investing in Gold
Rick Rule, Chairman of Global Resource Investments, makes a compelling argument that gold isn’t a commodity in as much as it’s insurance. “Gold is disaster insurance. You shouldn’t want it to go up. Would you want to be paid in life insurance, home insurance, or auto insurance proceeds? That would mean you want to die, have your house burn down, or get seriously injured!”
Rick finds the notion that some people actually want gold to rise to $2,500 an ounce extremely distasteful. He believes the only thing gold has going for it right now is its volatility. It’s why he owns gold stocks.
There’s a few other ways for investors to own gold…
- Physical Gold: Rick holds his physical gold in a bank safe deposit box. His is located at his half-year residence of Canada in the bank of Nova Scotia.
- Paper Gold: The SPDR Gold Trust ETF (NYSE: GLD) is a good option for investors who need liquidity with their gold assets. You can buy and sell this ETF like any stock on the market. Which also means you can sell it short, if you believe it will fall.
- Gold Coins: Gold coins are an easy way to own gold in your portfolio. Unfortunately, because of the demand, you’ll be paying a hefty premium to purchase them. This was discussed a little in our Panel Discussion, and we’ll have more for you on that dialogue tomorrow.
- Gold Futures: Gold futures may be an excellent option for some. However, he stays out of gold futures because he believes it’s too volatile. Rick believes silver futures are even worse, like gold futures on steroids.
- Gold Stocks: Gold producers trade between 1.7 and 2 times the net present value of their cash flows they could generate. It’s called the warrant on the gold price. Basically the market has assigned a large “growth” premium to a mining business – where the business gets smaller every day. There’s less and less gold to mine.
It also means that if gold went to $1,200 or $1,500, the cash flow these producers could generate would increase exponentially. However, this also works in the opposite direction. It’s why gold stocks are so volatile.
The second problem is that the gold industry as a whole has become greatly inefficient. Since the 1970s, when Nixon broke down the Bretton Woods monetary system to pay for the Vietnam War, gold prices have fluctuated from speculation from its controlled price of $35 to well over $800.
Rick explains it another reason why things are wacky with gold stocks. In a word, leverage. Imagine a $300 per ounce gold market where an inefficient producer mines gold at a cost of $320. That’s a negative 6% margin. If gold goes to $400 or above, there’s an infinite increase in profit, and better efficiencies on increases in price.
So ironically, Wall Street has wanted to see leverage in gold stocks to increase efficiency and make it easier to post stellar profits on gold rallies. It’s this leverage that’s also increased the risks and the volatility.
We had a considerable amount of interest in “profit generators” from Rick’s talk yesterday. People asked for more. So I talked with a few of the other experts to get their suggestions:
- Out of Eurasian Minerals investment director, Scott Close suggested Esperanza Silver Corporation (CVE: EPZ).
- Then Patrick Moodie of Rimfire Minerals was kind enough to recommend a few more: Riverside Resources Inc. (CVE: RRI), Almaden Minerals Ltd. (NYSE: AAU) and Cornerstone Capital Resources (CVE: CGP).
The Truth About Options
Karim Rahemtulla, Investment Director for Mt. Vernon Research, emphasizes that options have become much more popular because they are a tool to enhance returns. They are not just a way to go long or short. They are a way to use less money, protect, go long, OR go short.
Karim never thought he would see companies like GE fall into the single digits, and sees tremendous opportunity around him, “You can look at this market as a way to set yourself up for high profits, yet, with a degree of safety.”
LEAPs allow you to put very little of your capital at risk. These are long-term options, which are known as calls in shorter maturities. They let you go long – profit from increases in stocks – while putting only 15% to 20% of your capital on the line.
Then you get one, two, or three years of time to work on your side. In fact, there was one stock Karim suggested attendees look at (specifically, its 2011 LEAP) for that exact reason. Our audio recordings will have all the details. You can find out more, here.
He really emphasized that it’s easy to get confused with the complexity of options. It’s unfortunate, but it can be solved by focusing on a few simple option strategies:
- Covered Calls – allow investors to receive a premium on the stock you own. When you sell a call you give someone the right to buy your stock at a specified price, called the strike price. If the cost of the stock never goes above that price, you keep the premium they paid you and you don’t have to sell.
- Long Puts and Calls – Here you can use options to control fast moving stocks for a fraction of what it would cost to buy them outright. By buying a call, you have the right to purchase that stock at its strike price for a long time horizon. By buying a put, you have the right to sell at a particular price.
- LEAPs - These are long calls with extremely long times to expiration. This allows you to control the stock for a fraction of the cost of outright purchase. You can also do these in your retirement account.
- Put Selling – Here you sell an out of the money put on a stock that you don’t expect to weaken. If the stock doesn’t drop you keep the premium you take in.
Karim wrapped up with the three best strategies to use for the market right now: selling calls, selling puts and LEAPs.
Put Options: Getting Paid to Buy Your Favorite Stocks
Lee Lowell, from The Instant Money Trader, explained why so many investors on the sidelines are looking at put options as a way to buy back into this market.
The advantage of selling put options is that you get paid up front in cash from the put option buyer, which obligates you to potentially buy these quality stocks at below their current market prices.
There is a margin requirement involved. But it’s significantly less than what it would cost to buy the stock outright. And the total risks involved are no more than what it would take to purchase the stock outright.
Lee recommends selling put options that are either $5 or $10 out of the money that have three months until in expiration. There were three stocks in particular he recommended for this strategy right now: General Electric (NYSE: GE), Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC).
Racing Away…
Time has just been flying by over the past few days. Good people, great food and phenomenal market intelligence. We’ve hardly had time to catch our breath, so to speak. And just as I was thinking that, I ran into Keith Fitz-Gerald, Investment Director for Money Map Press.
Or more correctly, he ran by me. It seemed he was trying to catch a ride on one of the cigar racing boats in the harbor that I’ve been telling you about. As he stopped I asked him a little about the “Geiger Index” I’d heard so much about.
Apparently, it’s an algorithm he’s developed to monitor the market’s movements. It tips him off before big moves happen. I didn’t even have time to get more information out of him before he trotted off in search of cigar racing glory.
I didn’t have the heart to tell him the gusting winds we were receiving had cancelled most of the races. I will have my Editor in Chief, Alexander Wissel, send you some more information on The Geiger Index in the next day or so.
In many ways, this conference couldn’t have come at a more important point: With our new President, the markets recent plunge, the global upheaval and domestic economic disarray. As our last day closes out, the impression I get from many is that they’re more confident in what to expect based off of what they’ve heard over the past week.
And they aren’t the only ones. Even as an accredited finance professor, I’ve greatly expanded my knowledge this week.
Stay tuned for my wrap-up tomorrow, where in addition to touching on some of the biggest ideas and strategies from this week, I’ll give you an earful of the heated conversations from our panel discussions – which included green energy and gold coins…
It all starts with education,
Dr. Scott Brown
P.S. If you’ve been unable to attend this year, you won’t “miss the boat” by ordering the audio files of the conference. They’ll be ready for you to download in MP3 format very soon. You’ll also get the complete list of favorite picks Karim Rahemtulla, Rick Rule and Lee Lowell talked about at this event, for half the price you normally would pay – only $79. To get more information, go here.
- Options Investing: Readers’ Questions Answered
- Options Terminology: The Differences Between In, At and Out-of-the-Money
- Covered Call Investing: How to Boost Your Bear-Market Income Right Now
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2 Responses to “The Investment U Roving Reporter: Day 4 – Conference Report”
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Dr. Brown specializes in teaching stock investing because as he emphasizes "the stock market is where individuals and families have the best shot at succeeding financially!"
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March 31st, 2009 at 8:42 pm
Please explain something about options. I’m trying to learn as an Oxford Club member. I read elsewhere that “Writing” options has unlimited downside risk, and is only for the VERY WEALTHY. On the other hand, I’m told the one can use options to profit on stock movements up or down (call or put) with risk limited to the price of the option plus commission. Is one ever required to buy a stock or sell one? Is this requirement related to “writing” options? (I want to eliminate the possibility of margin calls.)
These seem contrary. I have a very small erratic income, and a small ammount of money to invest. Having lost well over $200,000 equity on a paid for home in Las Vegas, now thankfully rented, but the rental income has to pay for the improvements I needed to get it in “show shape”. At least as a real estate landlord, I can deduct the repairs, and interest on the CC’s.
So, which option techniques are safe for a “poor old lady”?
Thanks for taking time to read this, Liz in SD
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April 4th, 2009 at 1:02 pm
great artical need more on OPTIONS
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