With Operation Twist underway, commodities prices have descended over the past week or so. As I wrote earlier last month (and made a substantial purchase), I fully believe that gold is a place to be. To drive this conclusion, we looked for three variables: rising inflation, falling yields, and economic weakness.
Inflation is still rising (3.8% over the last 12 months, which is an even greater increase than September’s 3.6% TTM figure). Yields, thanks to the Fed, have certainly continued descending over the past three months (see image). The economy is, and will remain, weak for some time.
(Image from MarketWatch)
On the valuation side, gold stocks still seem to be lagging the metal on both 1yr and 5yr time periods. Hence, a long GDX position is more attractive than a long GLD position at this time. As for acting now, the security (and gold) has fallen substantially in the past few weeks. However, my investment thesis is unchanged–it even may have strengthened. Adding to my commodities on current weakness is a logical move. To execute the trade, I sold a put on GDX. Since I am considering increasing my position on a recent decline, I would be more willing to invest at an even lower price. Selling the put fulfills this desire while providing income in the process. The put is secured by cash, which I otherwise would not have deployed over the next few months.
Specifically, I sold one GDX Jan12 52P at $4.65. Net of commission fees, my breakeven price is roughly $47.50. If GDX stays above $52 through January, I pocket $450.02. If GDX falls below $52 at expiration, I have committed to purchasing 100 shares at $52 with the $450 subsidy, effectively making the breakeven price $47.50.
My Top Five positions has been updated accordingly.
For more information how selling cash secured puts (and covered calls) generates income, read Options – Income Producing Strategies.
