So the yellow metal is back on the upswing and so is the dollar. When you are buying gold, on some level you are getting short the U.S. dollar. But what if you want to remain long the dollar as well? As a result, any investment in gold itself may be tied to the dollar and its relative strength (or weakness) to other currencies, namely the euro, yen, pound, etc.
This negative correlation may theoretically reduce your potential profits, because the strong dollar negate some of gold’s rally in dollar terms The dollar represents the majority when it comes to liquid currency reserves, and the current global monetary system relies on the U.S. dollar as a reserve currency by which major transactions (gold included) are measured. This is the basic reason for this relationship.
Euro-denominated gold and its recent sharp rally have been in the news and the subject of blogs, chat and other coverage (aside from the rally in spot gold everyone is talking about).
Just yesterday, a colleague of mine on CNBC’s Fast Money, Dennis Gartman, talked about getting long gold in yen terms. On the show it seemed that everyone was baffled by his explanation of how to do this, so I thought I would share my thoughts about getting “synthetically” long gold in a dollar-neutral (vs. the euro) sort of way.
Please don’t take my words as a buy/sell/hold recommendation on Gold or any of the products mentioned. (Note: prices given as of Tuesday’s close).
One of the most popular ways for the retail trader to be long in Gold (other than the futures market itself) would be to buy the SPDR Gold Trust ETF (NYSE: GLD), which closed at $121 on Tuesday.
Long Calls in the Gold Trust
For options traders who want to synthesize a long position, one might choose an in-the-money call on the GLD. Let’s assume you bought 10 September 114 calls for $10.00 each. This would be an investment of $10,000 (the maximum loss in the trade) and would give you roughly 720 deltas in GLD. By taking this position, you are obviously taking a bullish position in gold itself. But let’s assume you thought the dollar would continue to strengthen against the euro. Any relative strength in the dollar might counteract natural price changes in gold unrelated to dollar changes. Because of this relationship, some traders may choose to neutralize that potential counteraction.
Balancing Out the Dollar/Gold Dichotomy
One way options traders can attempt to neutralize the impact of the dollar is to take a look at the Euros WCO ETF (NASDAQ: XDE). This is a euro/U.S. dollar ETF product offered by the NASDAQ OMX and ended yesterday’s session at $119.74.