Gold Options are similar to gold futures except they don't carry the same risk. Options give the buyer the right to control 100 ounces of the precious metal, but, if the market moves against the contract, the most the speculator will lose is his premium. When the market moves against a futures contract, things can get really ugly fast. The speculator can be on the hook for much more than what he paid to purchase the contract in the first place.
For example, lets suppose that you bought a futures contract on gold that has a 90 days left on it before it expires. The market price at the point of purchase is $800 per ounce. Your contract gives you the right to buy/sell gold for $800 an ounce. The market goes against you with 80 days left in the contract and now gold is selling for $750 per ounce. Fifty dollars below your contract.
In this situation, your futures broker would call you and ask you to put more money into your account which is now short 100 ounces x $50 = $500.00. If you refuse, he will sell out your position and you are still obligated to come up with the $500.00. Should you again refuse, he will go to court, get a judgment, and start the collections process.
Things get even nastier as your credit is negatively affected, your paycheck gets garnished and you end up with a lien on your house. You are no longer welcome in any futures brokerage and you wish you never got involved in the futures market. People have literally lost fortunes playing the futures market.
Now, lets pretend you own an option with the same control over 100 ounces of gold. The market goes against you just like in the above scenario. You can ride it out because the most you have to lose is the premium you paid for the option in the first place. If the gold price doesn't go any higher, you've lost that anyway. Now you can sleep at night.
In the futures market, you can put a “stop loss” order that forces your broker to sell into the market, but, you still have to cover whatever your losses were before the stop-loss order is executed. Things could still get crazy. Permit me to illustrate:
You buy a contract for $800. You also tell your broker to sell your contract if gold prices go lower than $798 per ounce. You're still on the hook for the $2 per ounce difference (100 bucks), but you consider this an acceptable risk. This is called a “stop-loss” provision/order and is designed to stop you from losing your shirt. 10 days in gold plunges $50 per ounce. As its falling, your broker is trying to sell your contract into the market. He finally finds a buyer when gold hits $795 per ounce. You guessed it, your liability just got a whole lot greater.
Now the real heart-breaker. Gold recovers after you sold your contract and actually goes up to $820 per ounce. Not only have you lost the profit ($20 per ounce x 100 ounces = $2000); you still owe your brokerage $500.
If you had bought an option instead. You could have waited out the bad and benefited from the positive move in price. Much less risk and far greater potential for a reasonable profit. Options make a whole lot more sense than futures contracts to the conservative investor. You get the same contract (100 ounces of gold), with the same leverage, with the same upside for profit.
What you don't get, is the sleepless nights and constant worry a futures contract can bring.
The Gold Futures Market is another way to make money with gold. However, it is also risky and could cost you a lot of money if you don't know what you are doing.
Traditionally, the futures market was a way for farmers to guarantee a future sales price, with a ready buyer, on crops or livestock that would not be ready for market until some point in the near future. Gold mines starting selling futures contracts as well.
A futures contract traditionally lasted for 30, 60, 90 or 120 days. It was a relatively short-term instrument designed to lock-in profits before actually selling your product. Gold futures were sold in 100 ounce increments. That is, one contract guaranteed the future sales price for 100 ounces of gold.
The buyer of a gold futures contract owns the right to buy (take possession) or sell the underlying 100 ounces of gold for the time period stated in the contract. He pays a relatively small premium to the actual owner of the gold for this right.
The investor (often referred to as a “speculator”) can buy or sell the gold for a stated price during the contract period.
Most speculators never take possession of the underlying commodity. Instead, they bet that the value of gold will either go up (a call contract), or go down (a put contract). If you believe that gold will increase in value, you are “going long”. If you believe that gold is going down in value, you are “going short”
For example, lets assume I buy a “call contract” on 100 ounces of gold valued at $850 an ounce. I have the right to buy the gold from its owner for the stated time period (30,60, 90 or 120 days) at the guaranteed price of $850 per ounce.
If gold increases by $50, I can sell the “contract” and pocket the difference ($50 x 100 ounces = $500).
The reverse is also true. I can buy a “put” contract because I believe the price of gold is going down in the near future. In a “put” contract the owner of the gold, or another investor, guarantees to buy the gold at a set price. If gold goes down in value, they still have to pay the price stated in the futures contract.
For example, lets assume I buy a “put contract” on 100 ounces of gold valued at $800 per ounce. If the price drops to $700 during the contract period, the owner of the gold, or another investor, agrees to pay out the difference ($100 x 100 ounces = $1,000) to whoever owns the contract.
The contract itself can be bought or sold in the futures market to other investors. The value of the contract relies on the following:
1. How much time is left on the Contract. 2. How close to the market-price is the price in the contract 3. How many investors want to buy the contract (supply/demand)
Gold futures contracts that are at or over (under in a put contract) the market price are said to be “in the money”. “In the money” contracts are already profitable for investors and thus they are more expensive. Most speculators buy contracts that are not yet profitable, in the hopes that price changes will bring these contracts “in the money”. The CBOE (Chicago Board of Options Exchange) is the marketplace in the United States where gold futures contracts are bought and sold.
Trading gold futures contracts carries the risk of huge losses as well as profits. If the price of gold goes against your contract, you are on the hook for the difference. They should be viewed as a highly speculative investment with a huge amount of risk. Don't bet money you can't afford to lose.
As a Financial Consultant with more than 20+ years experience I can tell you that inflation is a double edged sword. First, let's look at the pros:
If I buy a house for $200,000 and inflation is 10%, it makes my mortgage of $200,000 feel like $100,000 in less than 7.2 years. Thus debtors benefit as long as they have a fixed rate of interest that is less than the rate of inflation...(Please see my calculators at http://www.drocktonmortgage1.com). The same thing holds true for other debt on a fixed rate.
Inflation adversely effects the stock and bond market but will positively influence the foreign currency market and lead to dramatic gains in gold and silver (click here to learn more).
In fact, gold has averaged close to 30% return over the past 7 years and is great for IRA rollovers! When one horse is dying another is finding new life.
Money can also be made in the futures market in any commodity (gold, gold options, gold futures, oil, gas, wheat etc.,) during an inflationary cycle.
Now for the down-side:
Inflation will kill your 401K, State Retirement Plan, bonds, savings bonds and any other cash investments because it forces interest rates to go higher. New bonds are in competition with the existing ones that pay a lower rate of interest in your portfolio. Thus, higher paying bonds cause yours to loose value. Again, you are better off with gold bullion or gold bullion coins.
Wages rarely keep up with inflation and most people are not sophisticated enough financially to reap the benefits. Thus, 99% will be on the losing end. Among these are Farmers that are selling into the futures markets at a guaranteed price, builders that sell at a fixed price or anyone else that cannot provide immediate delivery of a product or service. On the other hand gold options and gold futures are a great hedge against inflation no matter what you produce.
As production costs increase, it cuts into profits and leads to cost-cutting at the expense of the consumer who is very "price sensitive" but not necessarily "quality sensitive". Thus the weakening dollar continues to lose purchasing power. Saving gold makes far more sense than saving dollars.
Inflation is a double edged sword. As long as you know which side will cut you, you can actually benefit from it. Sadly, though, the average individual will never realize those benefits with variable rates on their consumer debt; food and housing expenses; transportation costs; etc...
Gold is the logical hedge against inflation:
Small investors can purchase 1/10 of an ounce gold bullion coins. Every working family in America should be setting aside 10-15% of their income as savings. If everyone did this, it would play a positive role in financially stabilizing the family. With 70% of divorces resulting from financial stress, gold would also help stabilize relationships.
Since divorce has such a huge impact and cost to society at large, it would be in everybody's best interests to promote saving gold. To be effective, savings and investments need to be taught at the high-school level. A Mandatory section on buying gold should also be included.
For those not willing to wait on the politicians, some families have found that setting aside some time, one day a week, can be very beneficial for teachings about gold and other investments. Discussing family finances before they reach crisis levels could play a major role in preserving our families. Planning for crisis through saving gold and gold bullion coins should be an important part of that training.
Retirement plans should include a mandatory precious metals component for those that desire to invest in gold. Not in gold mines or gold resellers, but actual investment in the metal itself.
The basic format of any retirement plan assumes that you are deferring assets until you reach retirement age. Most plans rely on third party to administer the investors money. Among these are IRAs, 401 Ks, Roth IRAs and other popular retirement plans.
Gold Bullion is a great investment for 3rd Party Plans as long as someone else holds the assets. In other words, you won't take actual possession of your gold until you retire or another event takes place to allow you access to your gold without penalties. Some banks will act as a third party custodian for a fee. Remember, if you want to invest in gold, you better make sure your 3rd Party is someone that you can trust.
For those of you that are nervous about someone else having possession of your gold, there are other retirement vehicles available. These are called self-directed plans that allow you to hold onto your gold bullion directly. The two I like the best for gold are the SIMPLE IRA and the self-directed IRA.
You will need to talk to your tax professional about setting up a self-directed plan for gold. The rules are simple. You buy the gold. You hold the gold. You sell the gold. All transactions are reported as funding transactions whereby you avoid disclosing the asset; but you report on the amount of money you invested in gold.
Self-Directed plans are designed primarily for the self-employed. So, if you have a business, this is your best option for investing in gold. If you don't have a business, start one! All you need is a source of legitimate revenue and an LLC or Corporation with you as the principal owner. With the LLC, you should act as the registered principal. With a corporation, you should own the majority of the stock and act as President.
Corporations and LLCs are legitimate third parties and are allowed to purchase gold and gold bullion to fund retirement vehicles. Even if you are the primary owner!
To be eligible, the investment must be 90% or greater in gold content. This means that most gold bullion coins, like the American gold Eagles, are ideal assets for these plans. The benefit of minted gold coins is that they are also technically currency, another permitted investment for retirement plans.
One of the fears of owning gold bullion is the fear of the government calling in all of the gold and replacing it with a paper currency. This has happened before in the United States under Franklin Delano Roosevelt. Roosevelt ordered all Americans to turn in their gold for dollars under his gold confiscation act. He also made it illegal for Americans to own gold.
While this is a very real possibility in the near future, there are technical loopholes that will allow you to avoid confiscation.
1. No government can confiscate the currency of any other government. The United States, for example, cannot demand that Canadian Currency be confiscated. Neither can Canada confiscate US currency.
2. Gold Bullion Coins minted by another country cannot be confiscated by the United States Government.
3. The gold Krugerrand, minted by South Africa fell into disfavor as a result of Apartheid. Prior to that, it was the investment of choice in America before the gold confiscation act was repealed.
4. The Gold Canadian Maples, which are 100% pure gold, came into favor after the Krugerrand. They are available in 1 ounce, ½ ounce, and ¼ ounce and 1/10th ounce. These gold coins are softer because they contain no hardening metals. Store them in hard plastic cases for the best possible protection from scratches and defacement.
Gold Bullion Coins are coins that are produced as actual currency by the United States or another Government. They usually have a nominal face value (for example: the one ounce, United States Gold Eagle has a $50 face value). Of course, no government sells at the face value. Instead they sell Gold Bullion Coins for the market value of the gold plus a nominal premium for making the coin.
Gold Bullion Coins are usually available in in 1 ounce, 1/2 ounce, 1/4 ounce and 1/10 ounce. It is less expensive to buy a 1 ounce coin than two 1/2 ounce coins because you pay "manufacturing costs on two gold coins instead of just one. The same holds true for even smaller denominations. It is cheaper to purchase a 1/2 ounce than two 1/4 ounce gold coins etc.
Liquidity is the other side of the equation. It is easier to liquidate (sell) a 1/2 ounce gold coin than a 1 ounce coin. It is also easier to liquidate a 1/10 ounce coin than a 1/4 ounce coin. However, right now, and in the forseeable future, gold is far more liquid than any other asset regardless of the denomination and size.
American Eagle Gold Coins:
1. American Gold Eagle Coins are 95% pure gold. Although each coin has the stated amount of gold (IE: 1 ounce) it also contains copper to "harden" the coin and make it less scratch resistant. This in no way detracts from the coin's value. In fact, it can be seen as a positive for investors because the Gold Eagle is more resistant to scratching and other defacements that could effect its value.
2. Gold Eagles were available through the United States Mint, which manufactured them. However, due to excessive demand, the Mint's availability is sporadic at best. Most gold bullion coins are therefore, supplied by the secondary market.
3. Because the Gold Content is guaranteed and backed by the Good Faith and Credit of the United States government, gold eagles are extremely liquid and do not require a certificate or asayer to prove value.
4. American Eagles can be purchased here: or through a reputable gold bullion dealer, or coin dealer such as those that are listed in the Google ads on this site.
5. Gold Eagles have a nominal face value (IE $50 on the 1 ounce coin). This means you can spend them at anywhere that American Currency is accepted. This means it would be highly advisable to keep them away from family members and friends that would spend them as cash. As the coin is really worth almost 20 times face value for its gold content, spending it for groceries is enough to make any grown man or woman cry.
It is recommended that you store gold bullion coins in a protective plastic sleeve. If buying them in a larger quantity is desired, they will often be packaged in rolls of 10 (1 ounce Coins). It is important that the coins are not scratched or defaced as this will effect their retail value.
Gold Storage options include home safes, bank safety deposit boxes or even bank vaults. The option you choose should depend on the quantity of gold you have on hand.
Large quanties of gold require greater security. Most individuals don't have the availability to provide this type of security in a home setting.
Mid-size quantities and smaller quantities can be divided up between home storage and a bank safety deposit box. As I mentioned in a previous article, "loose lips sink ships".
So, the best home storage place is one that only you will find and/or know about. If you use a bank safety deposit box to store your gold, remember, access to the key is access to the gold. Make sure you store the key with the same care you would store the gold.
This means, don't carry it around on your key-chain. Any criminal worth his weight in salt knows what a safety deposit box key looks like. With a few sophisticated friends they could easily plunder your gold stash before you even know its gone.
Note: Paul A Drockton M.A. has a "perfect IQ" (190+). He is known for accurately predicting 1. The stock market collapses. 2. Gold Hitting $1,000 an ounce 3. The Housing Bubble collapse. 4. The Dollar Decline. 5. The derivatives impact. 6. The recession 7. Double Digit Unemployment 8. The unfolding Depression.