How To Apply A Bullish View On Gold

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There is absolutely no shortage of views as to where the price of gold will or will not be over the months to come. But there is a complete lack of commentary as to what will be the best way in which to apply a bullish or bearish view on gold.

One of the key factors that separates winners from losers in trading is not so much the view (often there is only a 50/50 chance whether one will get a view right) but rather the application of a view. I would go so far to say that luck has a very important role to play in determining whether or not a call will turn out correct of not. However, it is skill that converts this luck into fat profits.

I have a very bullish view on gold and this is based on my application of Newton's law of physics to financial markets: "for every action there will be an equal and opposite reaction". I think that all efforts by developed market central banks, particularly the Federal Reserve, to print money (debase their respective currencies) over the course of the last 2.5 years will ultimately result in a loss in perceived value of currencies proportionate the level of money printing that that has occurred. Given the magnitude of the money printing I think there is a very real potential for gold to move higher in a parabolic fashion over the coming months.

Now lets discuss how we should apply an ultra-bullish view on gold. Which is better, a system or method that wins 90% of time with $100 average winners and $1,000 average losers, or a system that wins 20% of the time with $1,000 winners and $100 losers. In this example, the 20% winning system is the better method. If this appeals to you then perhaps you should consider buying OTM LEAPS call options (long dated options) on gold stocks to apply a bullish view.

What is particularly attractive about call options on gold stocks is how cheap they now are. Implied volatility (the main variable that determines the value of an option) on gold stock options in many cases is more or less the lowest it has been in 5 years (probably more because this is as far back as my records go). In essence this means that you will get a significant amount of leverage for every dollar you invest in gold stock options. Have a look at January 2013 expiry options for the likes of Goldcorp (GG), Newmont Mining (NEM), Yamana (AUY) and Goldfields (GFI). I think a few thousand dollars into deep out of the money calls will bring pleasant surprises by Christmas next year!

About the Author:
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