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Gold Prices: Playing gold options in a volatile market

Posted March 27, 2008

"You know that gold is probably due for a correction… What do you do? You could weather the storm. You’re in for the long term, right? The trouble is gold stocks can fall a lot during even a typical correction." — Ed Bugos

by Ed Bugos, Whiskey & Gunpowder

Baltimore – (TFN): So you own a portfolio of gold stocks, and you’re worried about losing some of your gains to the return of a bear market on Wall Street, or a correction in oil prices, or a temporary bounce in the U.S. dollar.

You tell yourself that these things are not fundamentally bearish for gold prices. One of them is even bullish. But you know that gold is probably due for a correction anyway, and any one of these, or other factors, is just as good an excuse as any fundamental when confronting a risk-averse crowd.

What do you do? You could weather the storm. You’re in for the long term, right? The trouble is gold stocks can fall a lot during even a typical correction.

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Most everyone already knows that markets do not go straight up. If every dip led to higher and higher highs, nobody would ever lose sleep over it. Trouble is, the company could always screw up, or one of those dips could turn into a bear market. I have seen the conviction behind many buy/hold strategies melt at the tail end of a normal correction, just because it corrected invariably worse than expected.

In my observations, investors are more likely to get bucked off a bull market because one of the corrections discourages them than because they took some profits by selling into strength.

Goldcorp, one of the world’s largest miners today, has already seen three corrections of 40-50% on the way up to $45 from its $3 (split-adjusted) share price back in early 2001. That’s a 15-bagger! And it’s not over. Goldcorp will see a few more like corrections, and maybe one that’s even larger, on its way to $150. Hardly anyone who bought at $3 will still be aboard, and even fewer will sell the top. View a weekly Goldcorp chart for 2001-2008.

However, there are ways to improve your long-term returns and reduce the impact of market volatility on your portfolio without ever having to trade in and out of your shares and risk getting bucked off the bull too early. Options! Options allow investors to take advantage of leverage and limit their risk. Read on to learn how to play the gold market with options.

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