Hedging Gold Coin Portfolios
quickwing
Posts: 1,155
For most of the sophisticated collectors on the board this strategy is well known. However for others that often are tempted to sell bullion or bullion type gold coins during market surges there is another avenue open to protect profits or avoid paper loses while holding these coins in their portfolio.
Investment instruments have been developed in recent years that give “gold bugs” an alternative way to invest or hedge the price movements of the metal. One vehicle is the double gold Powershares, symbol DGP and trades as an ETN. The ETN is an exchange traded note, which is a note issued in this case by Deutshce Bank. This note is a direct obligation of the issuer, is unsecured, and listed for trading on the NYSE. The note is pegged to the price change in a gold futures index, and then multiplied by 2. For instance if gold were to change +3% the ETN would change APPROXIMATELY +6%. The same would apply on the downside.
The opposite ETN created (by Deuthshce Bank) to mirror the downside price of gold is symbol DZZ. The price of DZZ rises double the percentage move of gold to the downside. For example if the price of gold were to fall 10%, DZZ should rise APPROXIMATELY 20% in price.
If I held roughly $40,000 worth of gold coins and feared a price decline I could put on a hedge instead of selling my coins. The hedge would probably be cheaper to transact than selling and repurchasing my coins. As I write this the price of gold is $845.70 and the price of DZZ is $31.40 (and of course US Dollars). Let’s say I own 50 common St. Gaudens coins I price as bullion and I’m thinking gold will drop $100 per ounce. I could purchase 637 shares of DZZ for a cost of about 20K. If gold were to drop 12% I would expect DZZ to rise in price ABOUT 24% offsetting my loss on my gold coins. If I didn’t have 20K but believed in my thesis enough I could margin the 637 shares with a cash outlay of only 10K, but would have to understand the cost of margin over the time I expected the drop to take place.
If I just wanted to play the price movement of gold and chose not to go to the trouble of running back and forth to the safe or bank these instruments would provide the opportunity to do so. The cost to buy and sell depends on the price you pay your broker for a transaction. The price would be quite low if you used a internet discount broker, and you would receive a fair price without the “spreads” associated with real coin transactions.
This idea has pure motives since I do not work for Deutshce Bank nor receive any considerations or enumerations from them or a discount brokerage. The risks are with the ability of the issuer to make good on the note at maturity and during the trading period, AND the correlation of the price movement of the instrument to the actual price of gold.
Investment instruments have been developed in recent years that give “gold bugs” an alternative way to invest or hedge the price movements of the metal. One vehicle is the double gold Powershares, symbol DGP and trades as an ETN. The ETN is an exchange traded note, which is a note issued in this case by Deutshce Bank. This note is a direct obligation of the issuer, is unsecured, and listed for trading on the NYSE. The note is pegged to the price change in a gold futures index, and then multiplied by 2. For instance if gold were to change +3% the ETN would change APPROXIMATELY +6%. The same would apply on the downside.
The opposite ETN created (by Deuthshce Bank) to mirror the downside price of gold is symbol DZZ. The price of DZZ rises double the percentage move of gold to the downside. For example if the price of gold were to fall 10%, DZZ should rise APPROXIMATELY 20% in price.
If I held roughly $40,000 worth of gold coins and feared a price decline I could put on a hedge instead of selling my coins. The hedge would probably be cheaper to transact than selling and repurchasing my coins. As I write this the price of gold is $845.70 and the price of DZZ is $31.40 (and of course US Dollars). Let’s say I own 50 common St. Gaudens coins I price as bullion and I’m thinking gold will drop $100 per ounce. I could purchase 637 shares of DZZ for a cost of about 20K. If gold were to drop 12% I would expect DZZ to rise in price ABOUT 24% offsetting my loss on my gold coins. If I didn’t have 20K but believed in my thesis enough I could margin the 637 shares with a cash outlay of only 10K, but would have to understand the cost of margin over the time I expected the drop to take place.
If I just wanted to play the price movement of gold and chose not to go to the trouble of running back and forth to the safe or bank these instruments would provide the opportunity to do so. The cost to buy and sell depends on the price you pay your broker for a transaction. The price would be quite low if you used a internet discount broker, and you would receive a fair price without the “spreads” associated with real coin transactions.
This idea has pure motives since I do not work for Deutshce Bank nor receive any considerations or enumerations from them or a discount brokerage. The risks are with the ability of the issuer to make good on the note at maturity and during the trading period, AND the correlation of the price movement of the instrument to the actual price of gold.
OLDER IS BETTER
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Can someone translate this so a 6th grader would understand it?
Dave
Sure, in your case you have covered hedges but why make things more complicated?
If you fear a decline in the price gold, just sell some of your gold coins (not all of them of course).
If the price of gold RISES, you are doubling your level of losses versus the gain of the gold coins?
oreville you have vast experience and I value your comments always. However I am not in agreement with them this time.
<< <i>Quickwing: this sort of hedging (the uncovered kind) is what got our economy in trouble in the first place. >>
You do acknowledge this is a covered hedge but say hedging increases risk instead of mitigates it for the economy. I think it is leverage that could be a fault, where you take one side of a market, then ramp up risk. Noting with a smile DZZ is a leveraged derivative.
<< <i>If you fear a decline in the price gold, just sell some of your gold coins (not all of them of course). >>
Sure. But IF YOU WANT to keep your coins without financial loss the least expensive way to that COULD be this hedge.
<< <i>If the price of gold RISES, you are doubling your level of losses versus the gain of the gold coins? >>
No, actually you gain an almost exact amount of money on your coins that you loose on the DZZ position. So you break even in an up market using the exact parameters laid out.
coindeuce:
<< <i>Coin forum = Precious metals forum ? >>
Gold has fallen about 11 1/2% this week and DZZ has risen over 21%. The hedge has prevented any financial loss on generic gold holdings during the past week. Probably will release the remaining hedge very shortly.
Edited:Because I didn't want to post another thread, just wanted to go on record this morning. Closing out second half of spread with gold at 709 and selling the remaining shares of DZZ at $40.62.