How To Hedge Physical Silver And Gold Positions

How To Hedge Physical Silver And Gold Positions

There are many people who are worried about the status of the US Dollar and inflation. Since the inception of the Federal Reserve System in 1913 the US Dollar has experienced a continuous depreciation as the Central Bank debases the currency. Those who protected their savings through strategic purchases of gold and silver benefited from the bull market in precious metals which has been fueled by the loose monetary policy of the Fed and the unwillingness of our Government to live within its means.

The US Dollar has enjoyed the status of the World’s Reserve Currency. It’s not the first nor will it be the last fiat currency that came to receive such a status only to collapse under the weight of unsustainable expansion and unfunded liabilities.

Gold and silver are approaching overbought status as they have so many times over the past decade. During these times it would make sense to sell your physicial gold and silver and repurchase them after a pull back. The problem with that strategy is that few are willing to take the risk of losing their physical gold holdings in case the bull market continues full steam ahead. Another problem is the tax liabilities that arise from closing out a position. For those reasons most people simply buy and hold while having their positions ride through the ups and downs.

Gold and Silver Corrections

Having bought physical ounces of gold and silver incrementally over the past decade, your cost per ounce is significantly lower compared to today’s market value. Yet the many ups and downs provide excellent opportunities to profit from since corrections in the precious metals market can be extremely violent. From May 2006 to mid June 2006 silver corrected from a high of around $16 per oz. to the low $10s. During the same period, gold had a pull back from around $740 per oz. to the $560s. In 2008, despite the financial turmoil from the Bear Stearns collapse, silver experienced its most drastic correction of the decade. Having traded in the Spring of 2008 above $20 for the first time in decades, the precious metal acted very strong with solid support at $16. That didn’t keep silver from correcting from the $19s down to the low $10s within less than two months. Gold corrected nearly 25% during that time period from the mid $900s to below $750 per oz. As these price corrections in the precious metals market illustrate, seasonal fluctuations can be very significant and traders can benefit from such wild swings.

You can hedge your physical gold and silver to profit during market pull backs

Many investors, espeically gold and silver bulls, do not want to sell their physical holdings as long as the investment makes fundamental sense and they simply ride through the cyclical ups and downs. It makes sense that an investor would not want to pay a capital gains tax or possibly a higher price for the same precious metals position in case the pull back doesn’t materialize. The spread between the bid and the ask plus commission for such a transaction makes it difficult to make such a trade worthwhile. You can however, hedge your physical position and profit from market pull backs by buying Put Options on gold and silver ETFs such as IAU, GLD, and SLV. This hedge allows you to keep your physical gold or silver for the long term while holding a short term position that potentially yields a significant return. Since options decay with time it is crucial to time such a transaction well.

Hedging your physical gold and silver positions with Puts on GLD, IAU, or SLV can be an excellent strategy to take advantage of the volatility and significant corrections in the precious metals markets. Entering such a trade can make perfect sense after extended rallies when the metals reach overbought status. Any correction in gold at this time could become amplified since the changes in margin requirements took effect earlier this month.

List of Gold and Silver ETFs

  • SPDR Gold Trust (GLD)
  • iShares Gold Trust (IAU)
  • ProShares Ultra Gold (UGL)
  • ProShares UltraShort Gold (GLL)

  • iShares Silver Trust (SLV)
  • ProShares Ultra Silver (AGQ)
  • ProShares UltraShort Silver (ZSL)
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    This post was written by:

    Jesse Livermore - who has written 99 posts on WTF Finance.

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    • Greg Beris

      Technically not physical gold and silver

      • Dániel József

        Of course not. This is not “how to BUY” physical gold or silver. This is “how to HEDGE” the physical gold or silver you bought elsewhere.
        (If you aren’t familiar with the concept of hedging or options, I suggest you read up on investment basics, because these are worth knowing about.)

        If you want to know where to buy physical gold or silver, I’d suggest going here (yes please keep my referral id intact if you sign up, thank you):

    Precious Metals – Gold & Silver

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