Richard Pearce

March 17, 2008

Aside from the 100 oz. gold futures contracts offered at the CBOT and COMEX exchanges, there is a mini-gold contract offered at the CBOT. It's roughly 1/3rd of the size at 33.2 oz. Given the fact that gold is now trading around $1,000, even the mini contract is "pricey" at a value of just over $33,000. So if you don't have at least $30k worth of gold bullion, you would not want to short any futures contracts or you will be "over-hedged".

Unfortunately, options are only available on the 100 oz. contracts. But if you are interested in seeing what's out there, the December gold put option w/ a strike price of $900 closed @ $33.00 on Friday, March 15. (It's for a 100 oz. contract so the actual cost is $3,300). December gold futures closed at $1,014.50, so this strike price covers you, once December gold drops over 11% from the current price. The $800 strike put option would kick in after December gold dropped 21% or more. You leave yourself exposed to a bigger correction, but the trade off is that you pay $12.50 an ounce as of Friday's close. That's less than half the cost of the $900 puts.

You could also look at it this way: Paying $3,300 or $1,250 for the option is only giving away roughly 1% to 3% of the current market value to lock in some insurance for another eight months (the December options expire on November 25th). Since gold has gained over 10% in the last month, 1% to 3% isn't much of a give-up. I guess an investor would have to determine what size of a percentage correction in gold he can be comfortable with before he wants a hedge to kick in.

Another alternative would be to short some mining shares or buy put options on them. Put options on the XAU index might be a good idea, too.

Rich Pearce runs Pearce Financial. http://www.pearcefinancial.com

Note from Gary North: There are two ETFs that allow gold shorting: DZZ and (2x) DGZ.