Jeff Clark's Market Minute

How to Deal With a Black Swan in the Gold Market

It’s Mailbag Friday! And the postal carrier was especially busy this week.

I received lots of emails about a blog post I wrote to my Delta Report subscribers on June 6, about the 74th anniversary of D-Day. (Subscribers can access it here.)

Thank you to everyone who wrote in and shared their family’s D-Day stories with me. I fear that as the years go by, the sacrifices made on June 6, 1944, will fade into the abyss. After all, this year, none of the major news networks dedicated more than a few seconds of airtime to the anniversary.

Your emails made it clear to me that the sacrifices were not forgotten. Thank you for that.

And… I agree with many readers who suggested that before any president commits troops to a fight overseas, he/she should visit the American Cemetery in Normandy – just to be sure the sacrifice is worthy of the effort.

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I also received a ton of emails in response to my “Dear Dad” essay.

My heart was heavy when I wrote that essay late Sunday night. I wasn’t sure I wanted to publish it because it was so far off the topic of finance. But, frankly, I couldn’t write anything else until I got that out of my system.

Thank you for understanding my detour. And, to those of you who shared your own personal stories with me… THANK YOU SO MUCH. I can’t respond to you personally. But I’ve read every email. Your words are more valuable than gold. Which – as you know – I think is headed much higher.

Now… on to the finance-related emails…

Was it an unusual month for very few recommendations (based on lack of market volatility)? Somehow I was expecting more frequent recommended trading ideas.

– Sue

Sue, thank you so much for your comment. I’m sure lots of my subscribers are wondering the same thing.

Yes… over the past month I’ve made fewer recommendations than usual. We’ve had only five trades in the past month – our average is seven or eight.

Part of the reason is a decline in volatility. In a highly volatile market, there are more opportunities. And, over the past month, we just haven’t had the extreme conditions that generate multiple trades.

That’s going to happen sometimes. We’re going to suffer through periods of inactivity – where it makes more sense to simply hold onto your cash rather than trying to trade the market.

Now… I could just toss a trade or two out there to satisfy the craving of folks who want more recommendations. But if I‘m not willing to risk my own money in a certain environment, then I’m not going to make a recommendation for you to do so.

Please understand… I try to view any recommendation I make as something I would recommend to my own mother.

That might be too conservative for a lot of traders. That’s why I’ll constantly comment on the market environment in my blog. So, if you’re more aggressive, you can trade off of my comments without me making an official recommendation.

I am, however, a very conservative trader. I don’t try to profit on every small move in the market. Rather, I’m willing to sit in cash and just wait for a low-risk/high-reward opportunity.

Sometimes, that means I’ll have fewer trades than usual. But the trades I do recommend have a high probability for profit.

I suspect the past month is unusual. Volatility has been subdued. So, the next month or two should generate more recommendations.

Hi Jeff, I love your work! Especially appreciate your love of teaching – I love to learn, especially from a master teacher! Of course you can’t give individual investment advice, but I’d be grateful for your thoughts and suggestions re: a strategy for the following:

I’d like to position for a “black swan” in the gold market, to the upside. I have a strong long-term bullish gold bias. I already have a decent portfolio of GDX-type and GDXJ-type stocks and would like to supplement that with an options strategy. I’m thinking that selling 3-6 month uncovered GDX or GDXJ puts, slightly out of the money, might be a reasonable start, followed by investing the proceeds in similarly-dated farther out-of-the-money calls. The goal would be an inexpensive-to-free long call with the risk of being put some GDX or GDXJ stock at an acceptable discount to the current price. I’m sure many of your readers would be interested in any light you can shed on this situation. Thanks.

– Daniel

Hi Daniel. It’s not a secret that I love the gold sector. I expect gold and gold stock prices to be much higher in the days and weeks to come. Selling uncovered put options on GDX and GDXJ seems to me like a good idea.

The gold sector tends to be quite strong between July and September. So, if you’re going to sell uncovered put options, then selling something out to the September expiration looks like a good bet to me.

Can you explain why you recommended a (broad market index) put 44 days out if you expect a pullback within a few days? And also, why don’t you ever recommend weekly options on the (indexes)? Thank you.

– Tim

Hi Tim. Thanks for your question.

In just about every trade I recommend, I try to consider the downside. What happens if I’m wrong?

When I’m buying options, I try to avoid buying the expiration months with less than 30 days remaining. Those are the options that decay the fastest. So, if I’m not right on the trade right away, I don’t suffer too much from the time decay of the option.

So, even if I’m looking for a short-term move, I’ll usually look to buy a little extra time, just in case.

As for the weekly options…

There’s just not enough liquidity in the weekly options for me to recommend trading them. For example, whenever I recommend an S&P 500 index option trade, it usually creates 20,000 or so option trades.

That’s a lot of volume for the market to absorb. And the weekly options usually don’t have enough liquidity to allow my subscribers to get into position at a favorable price. The monthly options, on the other hand, are liquid enough to do so.

Best regards and good trading,

Jeff Clark

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