Update: Gold Mining Stock Hedge Ratios
Posted 11-10-2009 at 03:45 PM by HardAssetsInvestor.com
Real-time Monetary Inflation (last 12 months): 4.3%
Yesterday's Desktop column ("Investors Thinking: Time To Hedge Gold Stocks?") recapped a strategy for hedging gold mining stocks originally presented in "More On Hedging Gold Stocks."
Some readers wonder why a hedge would ever be needed. One, in particular, wrote, "If you think gold prices are going to run out of steam, far better to reduce your position, or consider tight stops."
That's true. It would be better, under most circumstances, to just take your money off the table. However, some investors may not be willing or even able to liquidate their positions at will. Short-term shareholders who'd pay the ordinary income tax rate on their profits might prefer to defer sale until their holdings qualify for the lower long-term capital gains rate. A hedge could buy them time.
Fiduciaries, such as estate executors, too, may be unable to sell portfolio assets without a court order, but are still obliged to take steps to preserve value for the beneficiaries. A hedge could dampen volatility until approval can be obtained.
For those who think the relation between gold miners share prices and gold is too volatile and asymmetric to make hedging reliable work, keep in mind that hedges should be contemplated only as short-term bridges over periods of excessive gold volatility, not permanent portfolio fixtures. Hedging, for example, might be appropriate while conducting an orderly liquidation of a large position in a volatile gold market.
Again, it must be noted that the risk being hedged when using the PowerShares DB Gold Double Short ETN (NYSE Arca: DZZ) is that presented by gold itself. Equity market and management risk remain. To hedge the totality of a gold stock's risk, options, if listed, may have to be employed. A short position in the Market Vectors Gold Miners ETF (NYSE Arca: GDX) could provide equity market protection as well. These positions, though, may not be appropriate for all investors. Short positions, for example, aren't countenanced in retirement accounts. The DZZ note provides short gold exposure without the need for margin.
Below are current one-year hedge ratios for a dozen popularly requested gold mining issues. Half of the issues (Goldcorp, Inc., Hecla Mining Corp., Yamana Gold, Inc., Newmont Mining Corp., Gold Fields Ltd., and Eldorado Gold Corp.) were profiled in the list appearing in last year's "More On Hedging Gold Stocks" column. Hedge ratios for these issues are higher this year, indicating the mining stocks' relative volatility has increased.
All the more reason, perhaps, to consider hedging ...
to view chart please visit here
Yesterday's Desktop column ("Investors Thinking: Time To Hedge Gold Stocks?") recapped a strategy for hedging gold mining stocks originally presented in "More On Hedging Gold Stocks."
Some readers wonder why a hedge would ever be needed. One, in particular, wrote, "If you think gold prices are going to run out of steam, far better to reduce your position, or consider tight stops."
That's true. It would be better, under most circumstances, to just take your money off the table. However, some investors may not be willing or even able to liquidate their positions at will. Short-term shareholders who'd pay the ordinary income tax rate on their profits might prefer to defer sale until their holdings qualify for the lower long-term capital gains rate. A hedge could buy them time.
Fiduciaries, such as estate executors, too, may be unable to sell portfolio assets without a court order, but are still obliged to take steps to preserve value for the beneficiaries. A hedge could dampen volatility until approval can be obtained.
For those who think the relation between gold miners share prices and gold is too volatile and asymmetric to make hedging reliable work, keep in mind that hedges should be contemplated only as short-term bridges over periods of excessive gold volatility, not permanent portfolio fixtures. Hedging, for example, might be appropriate while conducting an orderly liquidation of a large position in a volatile gold market.
Again, it must be noted that the risk being hedged when using the PowerShares DB Gold Double Short ETN (NYSE Arca: DZZ) is that presented by gold itself. Equity market and management risk remain. To hedge the totality of a gold stock's risk, options, if listed, may have to be employed. A short position in the Market Vectors Gold Miners ETF (NYSE Arca: GDX) could provide equity market protection as well. These positions, though, may not be appropriate for all investors. Short positions, for example, aren't countenanced in retirement accounts. The DZZ note provides short gold exposure without the need for margin.
Below are current one-year hedge ratios for a dozen popularly requested gold mining issues. Half of the issues (Goldcorp, Inc., Hecla Mining Corp., Yamana Gold, Inc., Newmont Mining Corp., Gold Fields Ltd., and Eldorado Gold Corp.) were profiled in the list appearing in last year's "More On Hedging Gold Stocks" column. Hedge ratios for these issues are higher this year, indicating the mining stocks' relative volatility has increased.
All the more reason, perhaps, to consider hedging ...
to view chart please visit here
Brad Zigler began his career as a trader for ContiCommodity, the trading arm of a the world's largest privately held grain dealer. Prior to his current role as managing editor of Hard Assets Investor, Brad was head of marketing, research and education at Barclays Global Investors' iShares exchange-traded funds complex and at Pacific Exchange's (now NYSEArca)options market. Representing the Options Industry Council, Brad has twice addressed Congressional and Senate panels on risk management and derivatives. In addition to editing for the Corporate Communications Broadcast Network, the Journal of Indexes, and CRB Trader, Brad has written for Mutual Funds, Financial Planning, Financial Advisor, Futures, Registered Rep. and Ticker magazines as well as The Street.com and MarketWatch.com. Brad's also been a financial correspondent for European Press Network, North Bay Business Journal and a PBS/NPR affiliate.
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