I want to have some exposure to gold and silver even though I think their benefits are often oversold. I don’t hate gold or silver. The one asset I actually hate is non-interest earning cash (not to be confused with interest bearing cash). For example, I have several bank accounts that I want and need to keep, but they pay nearly zero interest. I have about $30K in cash that is just earning almost nothing even in a 5% interest environment.
I could move the funds but I like everything else about my banks. But to make myself feel better and as though that money is being invested I am on paper combining that cash with a small brokerage account and targeting investments at 1X leverage overall. So the brokerage account may on its own be at 10X leverage but the combination needs to be at 1X. I want to evaluate whether gold futures or options offer a better solution for a portion of this account.
Market Data Snapshot
Here is a snapshot of the option and futures pricing I am seeing right now on January 12th, 2024.
Cost Comparison
Thoughts
The premium cost on the futures is much lower. For the futures the maintenance is only about $830 despite the fact that the contract specs is 10 troy ounces, meaning it controls about $20,580 of gold. Of course, it would not take much of a move for me to get liquidated if I was trading with so much leverage.
Though the cost for the options is certain more in terms of extrinsic value loss, I don’t think that is a waste because it caps the loss at about 8% if I purchase the January 2025 contract. There is no chance I suddenly have to take money out of my checking account to cover losses just because gold dropped in value. At the end of a year I may lose my 8%, but that is the worst that could happen.
The obvious downside is that over the last 100 years gold has only had a 4.7% annualized growth rate. So, statistically I would expect to lose about 3.3% in value this year. However, it is nice to be diversified and gold is in an uptrend. So, I think it is perhaps worth the risk.
Another benefit of the long term option is that I can get 100% long-term holding treatment rather than the 60/40 with futures. So for this particular scenario I do feel as though the option may be a better choice as I don’t plan to actively trade this position.
What am I missing?
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