Market Correction

The pullback I anticipated is finally occurring and accelerated in the last few days. The only strategy that is working are my puts on the SP500, a cruise liner and for-profit educator. I completely sold out of my oil trade, and lightened up on my gold and silver trade last week (although, in hindsight, I should have sold completely out of it). It's never bad to take profits.

What is hurting me is hanging on to pivotal-event driven biotech plays, although any of these stocks can pop up upon an FDA approval, successful clinical trial, or big commercial order. I expect continued weakness into the summer months, so hopefully these binary events are positive, and occur soon.

Gold--due for a pause--or ready to explode again?

I questioned whether gold was due for a pause a couple days ago, as the price of gold kept spiking up, breaking resistance levels. Well, the price shot up again overnight in Asia, BUT the mining shares didn't move much this morning. So I hedged this morning, not selling my positions, instead buying a couple puts, which will profit should ABX correct. Think of it as a cheap form of insurance in case gold pauses--without having to trigger a taxable event from profit-taking.

The price of the mining shares usually lead the actual price of the underlying commodity. In other words, it's gone up too fast and is looking heavy. There's that Physics training kicking in again...:-)

Having said that, I'm still bullish on gold medium- and long-term, as the fundamentals are unimpaired, to borrow a quote from Jim Rogers. But gold mining shares do look a bit tired at these levels. More conservative investors may want to take some profits off the table--a 100% profit in two months is nothing to sneeze at.

Gold, gold, and more gold...

I used the recent pullback in gold to purchase more Barrick Gold mining shares, albeit it at a higher entry point than my previous purchase of $19/share for ABX. I'm in at about $26/share, which is still cheaper than the $30 it touched earlier.

I also found a way to reduce future purchases to $18.90 by writing April 2009 ABX 22.50 puts, collecting $360 per contract. If ABX touches $22.50/share before the April expiration--and I get exercised, I'll pick up the shares, and since I get to keep the premiums whether I am exercised or not, my effective purchase price would be $18.90.

I also purchased rare gold coins at an auction, including the beautiful $20 St. Gaudens double eagle. I expect them to soar once inflation kicks in from the trillions of dollars of additional money flows.

I'm usually far from a gold bug--I am agnostic as far as investments go, but the inflationary scenario is too coompelling for me not to act. As long as the Fed and Treasury aim to bail out industry after industry, as long as banks and companies continue to collapse, and as long as the government continues to print money in unprecedented amounts, gold will have nowhere to go but up. There usually is a lag period before inflation accelerates, but the inflationary pressures are already starting to build. With short-term interest rates under 1%, it's only a matter of time before people figure out it's wiser to hold gold than devalued paper currency.

The other side of calls and puts...

Most speculators buy calls and puts, looking to earn exponential returns if they guess right on the movement of shares. Reading charts and using technical analysis, as well as exercising discipline and pricing models are pre-requisites in order to succeed. A great sense of timing--and luck help.

I normally don't like to do it, but selling covered calls is actually a conservative strategy to increase income and overall returns, so I've been known to utilize that strategy occasionally.

And I've never entertained selling puts--until now. Due to high volatility (as measured by the volatility index) and extreme uncertainty in the markets, options premiums have been astronomical. Hence, I sold a few puts on INTC, collecting the premiums, and lowering my entry point on Intel shares, should they dip below my strike price. If they don't hit, I still keep the premiums. Not a bad way to make money by doing nothing and standing pat.

And if the world were to end tomorrow, people will still go on-line, so Intel will be one of the strong brands that will be left standing. They have dominant market share, a strong cash position, no debt, and high margins. I like them at the present price, but I like 'em even more if the price falls further.