My Predictions about Gold
- Great Questions in the Mailbag
- When an ETF folds
- How far will gold rise?
I received some great emails from readers yesterday – notably a message from Mark I. who suggested buying puts as a way to profit from the tendency for the United States Natural Gas Fund (NYSE: UNG) to do nothing but lose money.
(For those readers unfamiliar with options, a put is a type of option that, to put it simply, goes up in value as the underlying asset decreases in value.)
It’s hard to argue with a strategy that could have yielded greater than 100% percent gains, month after month for the past year. I’m not exaggerating either. Options prices can surge by multiples as they approach the strike price.
Take a look at this table showing put prices for July expiration on UNG.
The bottom four prices are “in the money.” You can see how the $7 put costs 39 cents right now. But if it moved into the money, or even just got a bit closer to the money, it could double or triple in short order. That’s the strategy Mark uses – buying puts on UNG that are just out of the money. If the ETF share price goes down, his put option goes up in price and he can sell it back for a profit.
It’s not a bad strategy, and I want to thank Mark for sending it in. My only problem with the strategy at this point, is that I’m not sure how much farther UNG can fall. I doubt it would go to zero, or like other ETFs, they would just fold it if it dropped below a certain dollar per share mark. It happens more often than you’d think.
The firm Rydex just folded 12 of its ETFs a few weeks ago. Funds fold all the time, and I don’t want to be long or short a fund that might fold soon.
Like I said yesterday, I’m morbidly intrigued by UNG, and I will be releasing a full report – free to Resource Prospector subscribers – in the next couple weeks.
If you have any unique ways to profit from commodities in a market that goes up, down or sideways, please send them to me at editorial@resourceprospector.com.
I also received a very tough question about gold from reader Pierre C.
Pierre writes,
“I receive your research and see that you have been rightly positive on gold. Is there any kind of way or methodology to estimate a medium term target for gold? I saw some estimates talking about gold price of $6000 or even $160,000 per ounce.
What do you think of these (it seems they look at a peg for gold versus dollar, 1 for one)? Have you seen interesting research you can send me? My feeling: I bought gold last year. I think it should go to $1800, medium term. After, I do not know....”
Pierre asks a good, but difficult question about gold prices. Predicting future prices at all is something of a foolhardy venture. He also notes some methods for estimating gold prices. One method is the idea of putting the dollar back on the gold standard.
If you traded all of today’s gold for all of today’s dollars, there wouldn’t be enough gold at current prices. You can arrive at the same conclusion by dividing known supplies of gold by the current supply of dollars.
According to the World Gold Council, the known supply of gold above ground is currently about 5.32 billion ounces. The broadest supply of dollars (m3) currently sits at somewhere north of $13 trillion. So if we divide $13 trillion by 5.32 billion, we arrive at what gold would cost if it backed every single dollar: $2,443 and change per ounce.
Of course that number doesn’t account for any other world currencies, and how they might fit into the mix. According to goldseek.com, as of October, 2008, the world money supply was the equivalent of $58.9 trillion. That number has since ballooned, but even at that number, if world currencies moved to a gold standard, gold would surge to $11,071 an ounce.
For a medium term outlook, I think we can expect prices to be somewhat lower than $11,000 – but $2,443 isn’t out of the question.
According the Government’s inflation numbers, the inflation adjusted high for gold is just shy of the $2,443 mark at about $2,300.
Some economists like John Williams at www.shadowstats.com have poked holes in the Government’s inflation numbers, saying that they underestimate inflation.
And according to estimates from Bloomberg.com, the real inflation adjusted high for gold would be close to $7,000. You can read about these estimates at goldcore.com.
One of my favorite gold analysts, Jim Sinclair, famously made a standing bet of $1 million that gold will reach $1,650 an ounce by the second week of January 2011.
He made this bet in April of 2008, when gold sold for around $900 an ounce – so he certainly went out on a limb a bit.
To answer Pierre’s question – my long term predictions for gold are the same as many gold analysts: it will absolutely soar. The long term trend for the dollar is not good, because it’s used as a political tool first, and as a medium of exchange (or store of value) only as a secondary consideration. Politicians and central bankers will raid the dollar for every bit of its worth.
But in the medium term, I think we’d be wise to listen to Jim Sinclair. I’m guessing gold will hit $1,500 by the end of 2010 – but, I want to emphasize that it’s an educated guess – but still a guess.
If you’d like to hear about a way to prosper from the likelihood that gold will continue rising, I should caution you not to buy the asset at all-time highs. BUT there are opportunities to invest in gold in the junior mining sector. These companies typically lag increases in gold, so buying them after gold rises is probably the safest way to build a position. You can read all about my favorite small cap gold miner by clicking here.
Good Investing,
Kevin McElroy
Editor
Resource Prospector
