Gold pulls back, silver rallies, more risk-on

I’m really glad I shifted my stance on gold miners two weeks ago from really bullish to expecting a minor pullback. I went from being significantly long options in gold miner stock (and silver) to selling all of those, buying stock in the gold miner shares, and selling in-the-money covered calls on them. I definitely didn’t expect the pullback to be as large as it was … FNV went from 150 to 140, GOLD went from 28 to 24, and NEM went from 68 to 58. As of now, it looks like these options will expire worthless on June 19 leaving me with my shares.

As for the high dividend payers, they seem to be moving the opposite of gold miners – MO, GEO, PPL, LAZ and so on all went up considerably, so it looks like these may be called on June 19.

Silver has been catching a considerable bid lately, and I really considered going long again last Tuesday. I put in bids on the 2022 Jan calls, but they never hit my price and I didn’t want to chase. I’m plenty long precious metals anyway.

I noticed that the risk-on environment made significant pushes in both IWM (the Russell 2000) and EEM (emerging markets with largest exposure to China), so I purchased some puts in each of those.

Currently I’m thinking about this strategy going forward … I keep my gold miner stocks but don’t necessarily sell covered calls on them after they expire. I actually purchased a bit more GOLD last week when it dipped below 24, without selling calls so I can keep the upside. I still plan on letting the calls I sold expire though, no sense buying them back when it’s only a few weeks out. I plan to purchase puts in IWM and EEM slowly (only 1 or 2 contracts at a time), and only when they make a significant move higher (I got 1 put when IWM was at 135, then 2 more when it hit 145, now I wait until it tests resistance at 154. As for the high yield plays … I’m not sure if i’ll replace them or what with because a lot can happen between now and June 19th.

My overall view of markets today… We are in a bear market rally, driven primarily by a massive injection of money from the federal reserve. The federal reserve watches the stock market and bond markets, and they will step in if either struggle significantly. However, I fully expect them to continue to taper their weekly purchases as markets press higher – waiting for a drop before they make any significant moves foreword.

As for the underlying economy … I tend to think that many businesses will try to re-open this summer after taking whatever loans they could to survive the shutdown. Many of them – such as bars and restaurants – will have to completely re-stock perishables at considerable cost, and will be counting on sales strong enough to keep them afloat. At this time, consumers will be reluctant to go back en masse for a number of reasons … they are worried about potential exposure to Covid-19, they are worried about their jobs or finances and are trying to save money, or they simply don’t find it the same fun atmosphere when everyone’s wearing masks and social distancing. As a result, many businesses will end up shutting their doors permanently after a month or two of reduced sales. In my humble opinion, this will take at least a year to sort itself out, likely more, during which time the winners will be those large enough to have easy access to the bond markets and the smaller or family-owned businesses will struggle.

Anyway, here’s where I’m at portfolio-wise:

  • 11% cash
  • 6.5% 2021 puts
  • 6.5% 2022 puts
  • 1% 2022 calls
  • 3.5% gold miners
  • 39% gold miners with covered calls sold on them
  • 32.5% high dividend stocks with covered calls sold on them

Happy trading!

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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