Surge in $1,000 Gold Options

[powayseller]

The Telegraph.co.uk reports today:

A sudden surge in demand for gold options cashable at over $1,000 an ounce is the clearest sign to date that hedge funds and savvy traders are betting on a big rise in bullion prices.

UBS said investors had begun to show keen interest in “call” options to expire in December with strike prices of $1,000 an ounce and above.

The bank said buyers had even emerged for options dated late 2007 with a strike price of $2,500.

John Reade, the bank’s precious metals strategist, said: “Clearly some options traders are positioning themselves for very large moves higher.”

The prices are far above gold’s all-time high of $850 at the height of the oil and inflation crisis in 1980. Gold closed yesterday at $653.

Buying a call option gives investors the right to buy a quantity of metal (or shares or other instrument) at a fixed price, on a set date. If the price falls short, the option expires worthless. If it shoots above the strike level, traders can make huge multiples on their stake. “Put” options act in reverse, gambling on a price fall.

Mr Reade said: “They’re like lottery tickets. You lose most of the time, but when you win, you can win big.”

Click on the link above to read the rest.

[powayseller]

A friend whom I respect very much for her intelligence, asked me a question I could not answer. I know some of you will be able to help me out.

She said, “Why would an inert metal like gold be worth anything? You say it’s a safe haven, a means of trade, but at one time, so were coffee beans. Why don’t you just stock up on coffee beans?”

I said, “Gold has to be worth at least $300/oz, or in that range, because that is the cost of extracting it from the ground. But why is it worth more than that, why is there a premium above that, I don’t know.”

I see that historically, as well as today, investors buy gold as a safe haven in times of inflation. But why? It’s not like you can use bullion to pay your rent or buy your food.

Please, do not get impatient with me, because I know I have asked this before.

[davelj]

Doug Casey on the intrinsic properties of gold as a store of value and medium of exchange:

1. It is durable. It won’t evaporate, mildew, rust, crumble, break, or rot. Gold, more than any other solid element, is chemically inert. This is why foodstuffs, oil or artwork can’t be used as money.

2. It is divisible. One ounce of gold—whether bullion, coin, or dust—is worth exactly 1/100th of one hundred ounces. When a diamond is split, its value may be destroyed. You can’t make change for a piece of land.

3. It is (relatively) convenient. Gold allows its owner physically to carry the wealth of a lifetime with him. Real estate stays where it is. An equivalent value of copper, lead, zinc, silver, and most other metals would be too heavy.

4. It is consistent. Only one grade exists for 24-carat gold, so there is no danger of owning 24-carat gold varying in quality. Twenty-four-carat gold (pure gold) is the same in every time and place since gold is a natural element, unlike gems, artwork, land, grain, or other commodities.

5. It has intrinsic value. Gold finds new industrial uses each year. Of all the metals, it is the most malleable (able to be hammered into sheets less than 5-millionths of an inch thick), most ductile (a single ounce can be drawn into a wire 35 miles long), and the least reactive (it can stand indefinite immersion in seawater, does not tarnish in air, and can withstand almost any acid). Next to silver, it’s the most conductive of heat and electricity and the most reflective of light.

6. It is of finite supply and cannot be created by government. Gold can, of course, be debased with impurities or falsified in weight, and governments strapped for revenue have tried those tricks. But a trader can protect himself with a pair of scales or a vial of acid, although a familiar and trustworthy hallmark of a coin saves him that trouble. Unlike currency, gold cannot lose value because of government mismanagement. On the contrary, it tends to gain value because of government mismanagement. The amount of above-ground gold (by weight) has typically increased by about 2%-3% per year historically.

These superlatives, which have not changed over the last several thousand years (unlike paper money), make gold uniquely well suited as a medium of exchange and a store of value. Thus, arguments that gold’s value is “mystical” are ridiculous.

[rockclimber]

Why would you pay more for anything than the cost of the raw materials? (in this case, the cost to extract the raw material from the ground)

1. Supply and Demand
2. Value added by the assembly of the raw materials into something useful or desireable (e.g. a DVD player, gold fashioned into jewelry, concrete and steel into an overpass, slab ‘o granite into a countertop, etc.)

[powayseller]

Tim Iacono posted Arguments Against Investing in Gold. Please check it out, it is too long to paste here. In the end, Tim advises us to buy gold.

[sdduuuude]

This is a supply/demand issue, not a cost issue. Things are worth what they are worth. They are not worth what they cost to produce. Two very different things.

If I did own the land, I would never pay more for gold that the cost to extract it.

Because I don’t own the land on which the gold is found, the cost to me of extracting the gold is very, very high.

[davelj]

I don’t disagree. However, I think the issue at hand is IF you have to have a currency, or IF you’re going to peg the value of a currency to something (commodity or otherwise), gold (and to a lesser extent, silver) is your best choice because it is far less bad than all the others for all of the above-mentioned reasons.

[Anonymous]

It’s an interesting trade on $1000 gold futures.

I guess there are a few things that can make gold reach $1000 in half a year. Either the US dollar will crash in value, or there could be some type of significant dislocation (failure of the financial system, full regional war in the middle east).

My bet is that this short term trade is motivated by the current instability in the middle east. However, over a longer term, it’s a bet on a depreciating dollar.

[powayseller]

Gold prices are historically correlated with inflation, not with the dollar.

[rseiser]

My response to PS: Generally, coffee beans would be ok too, to preserve value. But not as good as gold, since gold has about zero yield, but coffee beans actually have a negative yield, that being the cost of storage and degradation. Also, coffee beans might be produced more efficiently in the future and have a larger consumption as well as production volume which can make them fluctuate more(?). Gold has shown over history, that most of it is still held, and not so much can be found easily anymore. Regarding the cost of extraction, good argument from the reader with the land, and I want to add that of course the marginal cost counts. If demand rises fast, and you wanted to extract more from the ground quickly, the extraction cost would be very high indeed. Quick note to the demand curve: During gold bull markets it actually becomes inverted, since investment demand drives speculation: The higher the price, the more people want it (not less like normal goods). This doesn’t help you in the long run though, since it will go in reverse again at some point. But it is surely fun to watch it on the way up.
Coffee could still be a great speculation too, if it is even more underpriced relative to history, supply/demand imbalances, and the fact that it could be volatile and not produced fast either. Jim Rogers recommends it and thinks it could go up several times.

[powayseller]

Yesterday, from Bill Fleckenstein’s Subscriber question site, The Rap

Bill,

Over the last few months gold has been up, down, up and moving down again. If one owns gold, gold stocks or the etf would it not make sense to sit still as the dollar has a lot working against it and the odds are it is headed back down. Can gold stay flat or go down as the dollar falls? My take would be that all though nobody has a crystral ball, gold eventually heads up.

Your thoughts……

ANSWER
• I believe that the dollar is headed down in a material way, and that gold will be the beneficiary of that.

[Author]

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