Shorting gold

[Uccmal]

I have started looking into shorting gold.  Does anyone have any ideas.  I will be avoiding leveraged inverse ETFs due to time-decay.  On the other hand shorting a leveraged etf can be quite lucrative but thats another topic.

 

I am not going to do it now... I figure gold has a ways to go yet.  I would be really early right now.

 

PLEASE start another thread to debate whether gold is in a bubble.

 

Any thoughts,  Thanks, Al.

[twacowfca]

I have started looking into shorting gold.  Does anyone have any ideas.  I will be avoiding leveraged inverse ETFs due to time-decay.  On the other hand shorting a leveraged etf can be quite lucrative but thats another topic.

 

I am not going to do it now... I figure gold has a ways to go yet.  I would be really early right now.

 

PLEASE start another thread to debate whether gold is in a bubble.

 

Any thoughts,  Thanks, Al.

 

 

Gold may still be attractive if US tax rates increase as scheduled next year because it's a nonearning asset not subject to taxation.

[stahleyp]

I have started looking into shorting gold.  Does anyone have any ideas.  I will be avoiding leveraged inverse ETFs due to time-decay.  On the other hand shorting a leveraged etf can be quite lucrative but thats another topic.

 

I am not going to do it now... I figure gold has a ways to go yet.  I would be really early right now.

 

PLEASE start another thread to debate whether gold is in a bubble.

 

Any thoughts,  Thanks, Al.

 

 

Gold may still be attractive if US tax rates increase as scheduled next year because it's a nonearning asset not subject to taxation.

 

Isn't gold subject to a 28% capital gains tax because it's considered a collectible?

[Guest broxburnboy]

The only way to short physical gold.. is to currently have some in your physical possession and sell it now, hoping to purchase it at a lower exchange rate later.

You could speculate on the futures markets, but that is speculating on fiat gold (there are more contracts than there is physical gold to back them) and carries counterparty risk... such as trading halts, failure to deliver etc... small perhaps, but growing.

Gold has become the anti-dollar and rises in price as the perceived worth of the dollar decreases. This is problematic if you want to short gold and you don't have any physical gold in your possession, you'll have to borrow some and sell it, or go long a double short gold ETF, or future contract, which is effectively the same thing.

 

Shorting gold in CDN dollars is a different proposition, as the CDN/USD  dollar tends to weaken with the US dollar strength that weakens the USD spot price of gold. You could short the currencies of nations whose currencies are backed by gold and other commodities, like AUS, CDN or the Swiss Franc.

[Uccmal]

brox, I was thinking along the lines of shorting a non-leveraged gold etf such as GLD-N. 

 

Leveraged ETFs are dangerous to go long due to time-decay.  They could be lucrative if you could short them but I expect the borrowing costs would be high since this practice was quite lucrative earlier on when leveraged etfs first came out.

 

Good point about the currencies.  I am just musing at this point.  My target would be to start shorting when everything is lined up on the buy side.

 

 

[StubbleJumper]

Shorting anything is always a risky venture....but a precious metal might be among the riskiest. 

 

I have some comfort with the notion of attempting to evaluate the intrinsic value of Company XX and then shorting the hell out of it if the current stock price far exceeds the intrinsic value.  You might be wrong about the exact intrinsic value, but if you have a decent margin of safety, your valuation work will leave you at least directionally correct.  However, as we saw with tech stocks, that kind of over-valuation can persist for quite some time, and it can even become a great deal more pronounced before markets come to their senses. 

 

I have a great deal less comfort with the idea of shorting a precious metal because I have no idea what these things should be worth.  Why does gold carry any value at all?  Sure, there are few industrial uses, but the majority of the demand is for jewelry and for hoarding.  I accept that it has always had economic value, but I really become puzzled when I try to assign some intrinsic value to it.  All of that to say that I would really be uncomfortable shorting something that I cannot value and that has demonstrated a past tendency to run hard and fast.

 

 

SJ

[ragnarisapirate]

 

I have a great deal less comfort with the idea of shorting a precious metal because I have no idea what these things should be worth.  Why does gold carry any value at all?  Sure, there are few industrial uses, but the majority of the demand is for jewelry and for hoarding.  I accept that it has always had economic value, but I really become puzzled when I try to assign some intrinsic value to it.  All of that to say that I would really be uncomfortable shorting something that I cannot value and that has demonstrated a past tendency to run hard and fast.

 

 

SJ

 

Well said. I think that it is interesting how we have used gold "as a store of value" for millennium, but that there is still sooooooo much debate as to what it is worth/if it is worth anything/how to value it.

[Guest broxburnboy]

Shorting anything is always a risky venture....but a precious metal might be among the riskiest.  

 

I have some comfort with the notion of attempting to evaluate the intrinsic value of Company XX and then shorting the hell out of it if the current stock price far exceeds the intrinsic value.  You might be wrong about the exact intrinsic value, but if you have a decent margin of safety, your valuation work will leave you at least directionally correct.  However, as we saw with tech stocks, that kind of over-valuation can persist for quite some time, and it can even become a great deal more pronounced before markets come to their senses.  

 

I have a great deal less comfort with the idea of shorting a precious metal because I have no idea what these things should be worth.  Why does gold carry any value at all?  Sure, there are few industrial uses, but the majority of the demand is for jewelry and for hoarding.  I accept that it has always had economic value, but I really become puzzled when I try to assign some intrinsic value to it.  All of that to say that I would really be uncomfortable shorting something that I cannot value and that has demonstrated a past tendency to run hard and fast.

 

 

SJ

 

Actually we don't really short physical gold, what is shorted is the USD/GLD ratio, the buck being the  commodity that is even more difficult to value. The only thing we know is that the number of dollars is increasing faster than the amount of gold and appears to be a major driver in its ongoing devaluation vs. gold.

Short the ratio if you expect this contango to reverse.

 

[Guest Bronco]

I don't trade gold, but wouldn't you wait for a breakdown?  It doesn't appear to me gold would trade on many fundamentals (ie earnings power), but rather on psychology and maybe seasonal factors such as Indian weddings, etc.

 

Seams dangerous to me, but I wish you luck.

[Guest broxburnboy]

I don't trade gold, but wouldn't you wait for a breakdown?  It doesn't appear to me gold would trade on many fundamentals (ie earnings power), but rather on psychology and maybe seasonal factors such as Indian weddings, etc.

 

Seams dangerous to me, but I wish you luck.

 

Many long term traders believe that the GLD/US ratio is the most predictable and tradeble commodity pair trade out there.

They believe the USD price of gold is in a long term bull hence physical gold should be a long term holding.

Fiat gold such as ETFs, future contracts etc. trade in an extremely transparent fashion. The owners of most tradable physical gold are the banks themselves, they use the physical gold (which they lease from the central banks) to balance the difference between the outstanding short and long interests they write.

They make trading profits, therefore their interest is in price volatility within the reality of a long term bull market.

Savvy traders trade with the banks... not against them. They pyramid sell into price strength and pyramid buy on weakness.. just like the trading desks at the

banks. They don't chase gold price and panic on price weakness.

This may seem like demented, paranoid ravings, but has been confirmed by historical trading patterns.

[Uccmal]

I was avoiding debating the merits of shorting or not shorting gold.  I just wanted to determine the best way to short it should I one day decide that it makes sense.  About the time my mother buys another ounce or her younger equivalent. 

 

A whole other thread could go on for years on whether it has or will maintain any value over time.  My recollection is that it reached around 800 US in the 1980s.  We are nowhere near that price yet on an inflation adjusted basis - say 4 % inflation - an equivalent today would be in the range of $2400-$3000.

[Munger_Disciple]

If you want to short gold, you can buy puts on GLD or any other gold ETF. It is of course not the same as shorting physical.

[twacowfca]

I have started looking into shorting gold.  Does anyone have any ideas.  I will be avoiding leveraged inverse ETFs due to time-decay.  On the other hand shorting a leveraged etf can be quite lucrative but thats another topic.

 

I am not going to do it now... I figure gold has a ways to go yet.  I would be really early right now.

 

PLEASE start another thread to debate whether gold is in a bubble.

 

Any thoughts,  Thanks, Al.

 

 

Gold may still be attractive if US tax rates increase as scheduled next year because it's a nonearning asset not subject to taxation.

 

Isn't gold subject to a 28% capital gains tax because it's considered a collectible?

 

 

Yes, capital gains taxes would be due for a purchase and sale at a profit, but there would be no taxable interest or dividends received while it was owned.

[gfp]

GLD and physical gold are taxed as collectibles at high rates.  Why wouldn't somebody who wanted to short gold just short the highly liquid futures contracts on the nymex?  There are even mini sized contracts at nymex and cme now if the contract size is too large for you.

 

My advice - don't short gold.  Work on company valuations where you have some edge (hopefully).

 

There are much easier and safer ways to make money than identifying the biggest bull market of the decade and trying to short it.  Just ask the owners of 10 year yield calls who thought they were making the trade of their lifetimes.  Bull markets end in speculative frenzy.  Prices usually become pretty stupid at the end when your cabbie is buying (houses/tech stocks/gold/bond funds)...  Most people own zero gold, so the bull market has a long ways to go.

[Aberhound]

I considered buying way out of the money puts on GLD when I noticed that there are large bets for gold to drop to $500. Buying puts on GLD gives you the additional possibility that the rumours about GLD not actually possessing the stated physical gold are true. Alternatively, it might turn out that there are multiple claims on the same gold. The trouble is that it is unlikely their will be an audit until the paper gold market collapses because of multiple claims. I have expected the paper market to collapse when I read the details of the gold and silver certificates which are offerred by banks. There is a clause in which the holder has to pay the extra amount which might be necessary to buy the gold or silver on the market. My conclusion was that such certificates were stupid investments because you get little upside except for slow steady price increases while you lose your return compared to holding bonds. When people realize this and try to exhange certificates for physical the market will collapse. It is similar to Maxim's Cakes in Hong Kong which collapsed in 1997 when everyone tried to redeem Moon cake gift certificates at the same time before the communist takeover. The trick is to foresee the trigger event then buy the GLD puts in time before the event. If you think a trigger event is coming please post and explain!

[Guest Bronco]

Question - are krugerands subject to 28 percent.  I believe they are currency. 

 

Will you be issued a 1099 for sale of these coins?

 

I would rather own these than gld or miners or anything else.  And they are like brook Burke - gorgeous!

 

 

[Mungerville]

Ucc,

 

The way I tend to short the stock market reasonably cheaply is to short the etf with deep in-the-money puts - say 15% in-the-money.  

 

1.  I find it relatively cheap, mainly because my opportunity cost for cash at that time is usually very low as a value investor (as most things are expensive, hence my wanting to short).  So its a value investor arbitrage thing (as my opportunity cost for cash is usually much much higher in the normal course).  

 

2.  Further, if the stock market moves against me, a) I can't get totally wiped-out with my put option (as its an asymmetric short position rather than a standard symmetrical short-sale position and the downside is therefore capped) and b) I actually have a little cushion in terms of the time-value of the put option retaining value should the market move up against my trade and closer to my strike price - this value retention is greater the longer-term the put option is (but so is the cost so that is the obvious trade-off when you are deciding on the put option's term).  

 

But all in all, the cost is low for me (because I neglect the opportunity cost of the extra cash it takes to buy deep in-the-money puts) and the position is less risky.  

 

This can be applied to any etf with put options on it.  I hope it is helpful in a general way to you, its been a while since I have posted I guess.

[gfp]

Yes, Krugerrands are taxed as collectibles at punitive rates in the United States.  Many people sell under the minimum reporting amount (just changed under Obama I believe) or sell on eBay and neglect to report on their tax returns.  Many coin dealers will not have the word "coin" in their name to facilitate this (example "The Camino Company" in burlingame, CA).

 

Currency profits are also taxed in our country.

[twacowfca]

Yes, Krugerrands are taxed as collectibles at punitive rates in the United States.  Many people sell under the minimum reporting amount (just changed under Obama I believe) or sell on eBay and neglect to report on their tax returns.  Many coin dealers will not have the word "coin" in their name to facilitate this (example "The Camino Company" in burlingame, CA).

 

Currency profits are also taxed in our country.

 

Please explain.  Does this mean that capital gains on gold are taxed at a higher than normal rate?

[gfp]

Yes, currently a long term capital gain on a gold mining stock would be taxed at 15%, where GLD or bullion would be taxed as a collectible at 28%.  All subject to change in the future, of course.

[Guest Bronco]

Global - thanks for the facts.  Now I am wondering how heavy the compliance is for the rules you outlined!  Near 100 percent for sure!

[Eric50]

Central Fund of Canada (CEF) that holds gold and silver is taxed at the long term rate if hold more than a year.