Riding Gold again

Until the Fed looks to begin raising interest rates, the price of gold will not fall.

Sell $115 Sept GLD put at $3.5
Buy $112 Sept GLD put at $2.6

Reiterating - Gold is going higher

I have taken great interest in the gold debate. Here is what I have found...

There are two major laws to investing in gold.

(1) Gold tracks neither inflation or deflation as a rule, instead gold tracks financial instability

In periods of financial instability, there is a rush to safety to buy treasury bonds and the like. Investors also become skeptical of paper currency. That is a strong bullish case for gold.

(2) Gold consistently increases when short term interest rates are at nominal zero

When the Fed is pumping money into the system to fight whatever financial ill is in the system, this is also a bullish scenario for gold. Right now, the Fed is trying to unemployment and financial instability. Both drivers warrant an extended period of low interest rates. So when will the Fed raise interest rates?

(1 + 2) The Fed historically has only raised rates six months after unemployment starts to fall from peak levels

Based on the current reports regarding the dwindling stimulus and the temporary census jobs boost, unemployment should decline from current levels for the rest of 2010 and early 2011. Thus with the instability in Europe, and these structural problems in the US, the Fed will keep interest rates low as a safe strategy. This is an "all clear" bullish sign for gold for the rest of the year.

Gold is on the rise

No confidence that more loans will resolve the issue of too many loans in the Euro Zone.

Gold is the play of social instability.

Selling GLD Jul 10 $118 puts for $4.5 and buying $115 GLD Jul 10 puts for $2.9

Now is the time for gold

This was originally written 9/13/2009

This blogger is now a gold bug. I tried to fight it, but now it makes too much sense. I even think gold is cheap.


Gold has been used as substitute currency at least since rhe Songhai king Mansa Musa flooded Western Civilization with the metal in the 1500s. In the first part of the 20th century, gold was used to back the government currency. The gold standard was abandoned in US but even today central banks and investors use the metal as a hard currency.


It is often stated that gold is an inflation hedge. It is not just sensitive to inflation. The value of gold rose significantly in real terms during The Great Depression, the most severe modern deflationary period. Gold actually rises in value during times of economic or geopolitical stress.(C) So whether it is the realization of trillions of losses by banks or the debasing of the US currency by massive borrowing by the US government, both scenarios contribute to stress and thus justify an increasing price of gold as a de facto currency.

Evidence of the upside of gold can be observed from many different sources.

(1) Miners

The world's largest gold producer, Barrick Gold, abandoned $3B in prices hedges to get long gold, you have to expect there is upside.(B)

(2) Short sellers

Greenlight Capital is long gold and cites due to emerging market central bank purchases. (D)


The author is long gold at $107.50.


(B) "Barrick Eliminates Hedges, Plans Offer", SF Gate, Sept 8, 2009, by Rob Gillies


(C) "Currency Trading and Intermarket Analysis" by Ashraf Laidi


(D) Greenlight Capital 2009 Q4 Newsletter