Gold appeals to many investors, but usually for just one reason.
That key reason being, it’s an inflation hedge. It’s a safe haven for those that want shelter from central bank money-printing.
Meanwhile, skeptics claim gold doesn’t work that way.
Funny enough, both arguments are supported by data.
Academic researchers recently explained how the numbers support both sides of the debate:
“Since 1975, periods of high real gold prices have occurred during periods of elevated concern about high future price inflation.
Five years after the real price peaks in January 1980 and August 2011 the nominal (real) prices of gold fell 55% (67%) and 28% (33%), respectively.”
In other words, gold does rise when inflation fears rise. Prices then fall as inflation fears recede, no matter what the inflation rate is.
After gold peaked in 1980, the price fell 55% over the next five years, even as inflation averaged 6.3% per year.
What does this suggest?
That gold’s price isn’t tied to inflation quite so much as it is fear of inflation.
With this in mind, it’s clear that gold can be a great asset to trade…
What’s the Best Way to Trade Gold?
Right now, inflation fears are rising. That means it should be a good time to buy gold.
But that brings up the age-old problem of how to own it.
You could buy the metal directly. Though that requires finding a way to store your investment, and you’ll endure a difficult and expensive process when it’s time to sell.
An ETF like SPDR Gold Shares (NYSE: GLD) seems like it’s designed to eliminate that problem. It is easy to buy and sell. It’s also less expensive to trade than gold bars or coins.
But GLD carries interesting tax implications.
Before I go on, let me make it clear that I’m not a tax expert. Just a chronic complainer about all the work we have to do to give the government part of our money.
You should consult your tax expert for specifics on this investment. That said, here’s what I do know about GLD…
The IRS treats investors in GLD as if they own a pro-rata share of the underlying holdings of the fund. In other words, as if you hold one-tenth of an ounce of gold per share of GLD you have.
This means you will receive a special tax form that could create extra work.
Long-term gains in the fund are then taxed as collectibles. That means the tax rate is 28%. Or, the rate at which the gain would be taxed if it were ordinary income, if that’s lower. Short-term gains should be treated as ordinary income.
No matter what the rate is, there is an extra form to deal with.
Because of the tax implications of GLD, some traders look to futures which receive favorable tax treatment. But I explained earlier this week that futures aren’t right for most individuals.
Fortunately, there is one option that sidesteps all these issues. Something we talk about quite a bit in these pages.
How to Trade Today’s Inflation Fears
GLD options can provide exposure to gold and carry limited risk — you only ever risk the amount you put into a trade. And they’re taxed like a trade in any option, normal ETF, or stock.
Options also let you benefit from both rallies and declines in gold, so your position can change with inflation expectations. That’s not something you can do with gold bars or shares of GLD. At least not without the ability to short, which has unlimited risk and is not available to most individuals.
GLD has both short-term and long-term options. Each has their own unique use case.
Traders can use short-term options to trade the release of inflation data or news regarding possible changes in Federal Reserve policy. Long-term options could be the best choice for hedging inflation.
Traders can buy calls on GLD expiring in January 2023, offering about 16 months for the trade to work. A $160 call costs about $16 per contract ($1,600, as each contract covers 100 shares) and is profitable if gold gains about 6% from today’s levels.
The downside is limited to that $1,600 per contract, about 10% of the cost of 100 shares of GLD. At the same time, risks for a trader buying GLD are more than 10%, plus they have extra work at tax time.
This just shows the versatility of options…
They aren’t just a vehicle to trade the ups and downs in virtually any market. They’re also a way to make the painful act of paying the U.S. government just a little bit easier…
Editor, One Trade
Chart of the Day:
Time to Shine
By Mike Merson, Managing Editor, True Options Masters
Today I’m spotting a pretty clear descending price channel, in conjunction with the major support we looked at on Tuesday.Mike has inspired me… Let’s take another look at the gold chart.
Gold prices have chopped around through this channel since the metal peaked in summer 2020. But lately, the major horizontal support at $1,680 has halted gold’s progress through the channel.
We’re now getting the fourth… arguably fifth… breakout attempt of this channel since the pattern formed. All while the equity markets are amid a bout of turbulence.
This could be gold’s time to shine. I would view any weakness from here as an even better opportunity to get into the longer-term GLD options that Mike mentioned above.
Managing Editor, True Options Masters