Creating Our Own Market in Gold
I think gold is headed lower in the short term but higher in the long term. We’ve already had a nice correction from the $1,330 level to the current $1,280s.
These are factors that could cause gold to head higher:
- Geopolitical uncertainty
- Local political uncertainty
- A weaker U.S. dollar, something President Trump has called for
- Continued trade uncertainty, which also leads to market uncertainty
- A Fed rate cut.
These are factors that could cause gold to go lower:
- Positive resolution to the trade issues
- Rising tensions with countries like Iran
- Lack of inflation
- A Fed rate hike.
As you can see, there’s a lot in play here. I can say with relative certainty that at some point over the next two years, we’ll have an event that will push gold higher – but that does not address the short term and the possible price decline that could continue.
So we’ll take the best of both worlds by employing a strategy called a “calendar spread.”
When we enter a calendar spread, we buy an option with one expiration date and sell another option against our option that has a different expiration date. It’s a sophisticated strategy and one we’ll walk you through in The War Room.
Here’s what we did with gold. We bought a two-year LEAP option on Barrick Gold (NYSE: GOLD), the biggest, strongest and, thanks to the recent acquisition of Randgold, lowest-cost producer.
Against our two-year option, we sold an option that expires in about eight months. Here’s an example of this type of trade with fabricated numbers.
Let’s say Barrick is at $12.50 (we assume you can buy the two-year options on Barrick with a $15 strike price for $1), and the Barrick $14 options expiring in one year are trading for $0.50. Your expectation is that Barrick will trade over $15 at some point in the next two years.
So with a calendar spread, you would buy the two-year option for $1 and sell the one-year option for $0.50. Now your cost would be $0.50.
If Barrick stays where it is and doesn’t break $14 in the first year, your cost would be a realized $0.50. If it goes to $15 the first year, you would still be ahead since your $15 option would increase in value faster than your $14 option because it has more time left on it.
The best case is for the option you sold to expire worthless, dropping your cost to $0.50, and then having Barrick Gold go on a tear the second year.
Action Plan: By employing this strategy on Barrick Gold, we’ve created our own market, where a down move in gold will result in a gain on the option that we sold and an up move in gold will result in a gain in the option that we bought.