As discussed in the past, CCI continues to get the gold allocation of an overall portfolio from owning calls in the gold etf (gld) that are funded but the sale of puts in the gold miners ETF (gdx). The rationale for this strategy was originally discussed here, and has been followed under the gold risk reversal (grr) tab in this blog. The primary objective of this approach is to profit from any relatively rapid rises in the price of gold due to some macro level event, while trying to minimize the capital required and risk of having this exposure.
Year end seems like an appropriate time to summarize performance of this approach. Long time readers will recall that this approach was first started on Feb 4 of 2011. For the 11 months of that year a handful of these type of trades were successfully made. The performance for 2/4/11 to 12/31/11 was
- CCI gold risk reversal approach (GRR) – 36.2%
- Buy and Hold of Gold over the same time period – 15.5%
- Buy and Trade Gold with the same timing as GRR – 25.7%
CCI took a small portion of the gains off the table at the end of last year, and executed the same process more consistently in 2012. The performance for 2012
- CCI gold risk reversal approach (GRR) – 11.0%
- Buy and Hold of Gold over the same time period – 6.6%
Yes, that is two years in a row of approximately doubling the returns on gold! Further, this return is calculated assuming the puts in gdx are cash secured. The returns on the just the capital required to hold the puts would be 3 to 4 times greater! Of course loses would also be magnified in a similar manner if calculated in this manner.
Encouraged by these results and feeling gold might be poised for another spike in price as Washington DC entered the post-election/cliff/ceiling period, CCI doubled the portfolio's allocation to gold(discussed here). The timing of this decision was not too good...yet. Performance for 11/7/12 to 12/31/12
- CCI gold risk reversal approach (GRR) – (-2.5%)
- Buy and Hold of Gold over the same time period – (-2.4%)
Obviously past results are not a indication of future results. Gold has been down in the first few trading days of 2013. That means very early results for 2013will be negative on this approach. It also means the time to adjust these positions might be approaching. Specific holdings as of now are:
- Short 3 March $45 GDX puts for every 1 long March $170 call
- Short 3 January $47 GDX puts for every 1 long January $175
FYI, 1/9 closing prices was $44.35 for GDX and $160.50 for GLD