Thus, if you want your gains and losses to roughly mirror those on a single ounce of physical gold, you would buy 10 shares of GLD or 100 shares of IAU.
So that you can see exactly how these ETF shares track actual gold prices
, Table 1 compares prices for GLD and IAU with the price of the nearby April COMEX gold futures contract at key points over the past couple of weeks:
For cost-comparison purposes, 100 shares of GLD would cost about $16,150, or half that if purchased on margin, versus the $10,250 margin deposit and $165,000 value for a COMEX gold future. A hundred shares of IAU would cost just $1,620 or so, again about the value of one ounce of gold.
More importantly, with both funds, the losses would be proportionately smaller than the risks on a gold futures trade – a key consideration when the market is highly volatile as it has been recently.
As an example, when April futures prices plunged $51.30 last Wednesday to give contract holders a loss of $5,130, the owner of 100 shares of GLD would have lost just $256 ($162.13 – $159.57 = $2.56 x 100).
Of course, any gains would also be proportionately smaller, but the percentage returns would be roughly the same – or even larger if trading on margin.
Trading Options with Gold ETFs
As noted earlier, if you don’t want to plop down the cash to purchase 100 shares of GLD, the ETF also has actively traded options over a wide range of strike prices and expiration months. (Note: Options are also available on IAU, but because of the lower share price only the first couple of months and nearest strike prices are actively traded.)
That means, based on quotes early in Friday’s trading session, you could purchase an at-the-money GLD April $161 call option for around $3.30 a share, or $330 for a full 100-share contract.
That option would give you the right to buy 100 shares of GLD at a price of $161.00 a share ($16,100) at any time between now and the April 20 expiration date.
If gold rebounds to its March 1 level of $1,720 in the next month, carrying GLD to around $167, that call would increase in value to $6.00 a share (or slightly more), giving you a gain of $270 or so – a return of more than 80% on your initial $330 investment. In under a month!
Similarly, if you’ve turned bearish on the yellow metal for the short term, but don’t want to unload your physical gold, you could buy put options on GLD.
As quoted Friday, an at-the-money June $161 GLD put would cost you about $5.25, or $525 for the full contract.
That option would give you the right to sell 100 shares of GLD at $161.00 per share any time between now and June 15, at least partially offsetting the losses on your gold holdings should the price continue to drop over the next three months.
To illustrate how the option premiums track both GLD share prices and the overall price of gold
, Table 2 shows the price changes in the April $166 GLD call and put (the at-the-money options on March 2) in response to gold price movements over the past couple of weeks:
Obviously, both the outright call purchase and the outright put purchase just described would be speculative plays, but that’s not the only way you can use them.
The options on gold ETF shares can be used in any of the conservative or hedging strategies detailed in the “Options 101
” articles Money Morning
has published the past few months, or with any of the techniques discussed in our earlier “Defensive Investing
Related: iShares Silver Trust (NYSEARCA:SLV), Market Vectors Gold Miners ETF (NYSEARCA:GDX), ETFs Gold Trust (NYSEARCA:SGOL).
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