Risk-Return of Gold Sector in 2020

When evaluating investment opportunities, I always look at both potential return of being right and risk of being wrong. Far too many people only consider the upside and not the downside.

While gold bullion is not technically fixed-income in that it does not pay a yield and gold equities are certainly not fixed income either, their behaviour as an asset class is a bit more like fixed income than it is like equity. But in most cases, gold just does its own thing and for that reason it’s an extremely attractive asset class. Let’s explore.

Correlation Gold Bullion (GLD) vs. (VT) FSTE Total World Stock ETF

The long-term correlation between gold bullion (GLD) to equities (VT – FSTE Total World Stock ETF), is sometime positive, sometimes negative, but generally very low. That makes it an asset class you want in your portfolio.

Correlation Gold Bullion (GLD) vs. (AGG) US Total Bond Market

The correlation to bonds is similar actually, but most opposite. Sometimes positive, sometimes negative, but mostly low. The major trouble with Gold versus stocks and bonds is that it has no real (after inflation) yield to it (dividend or interest). But when bonds and equities have a negative real return, gold is even more important as an asset class and diversifier in portfolios. On Sept 24, 2018 Berman’s Call, we highlighted our very bullish view on gold and gold equities. We highlighted this relative value chart (now updated) pointing to extreme low valuations of gold equities relative to bullion. While the move from $1200 to $1500 has had a small scale breakout to it, we do not believe that this cycle of low rates influence on gold is over until we see the sector full of love again. We are nowhere close to that based on this view.

S&P TSX Gold Index vs. (GLD) Gold Bullion

So how do we position in an asset class that has clearly resistance to the next tier of breakouts (above $1550) that would take it to the previous high ($1921) at the same time it could fall back to test the breakout ($1375) levels? Options!

A long straddle or strangle is a bet that volatility expands, but you are not sure of the direction. This makes the most sense when volatility is cheap. A put spread is a long position closer to the money (current price) and a short position farther out of the money. A ratio put spread is best used to buy a dip with a better risk\return profile.


With a January 15 2021 strike date that takes us through the US election, the following prices are seen for options on gold bullion (GLD) and gold equities (GDX). We want to express a bullish position on the gold market. We see major support between $23-25 for GDX and $128-132 for GLD. We are buyers in these ranges.


The potential breakout for gold bullion is significant. We can see GDX hit $40, which is a 50% return from current levels, but we could also see a test of the breakouts on the downside should markets continue their excitement over a US-China trade deal and an equity friendly FOMC.

GDX 26.74 GDX Option GLD 138.25 GLD Option
Buy 1x $27 Call $3.35 Buy 1x $138 Put Close to zero
Sell 2x $24 Put $6.00 Sell 2x $132 Put $3.05 x 2 = $6.10

When using options, you always must want to own the position. At current levels, risk vs. return analysis is attractive and owning exposure on an outright basis is attractive. But we can improve on it and for us, we always want to make bets where risk versus return characteristics are maximized. What if we are wrong before what if we are right focus.

You can always go long and put in a 10% downside stop, but with a gold VIX of 10% tells you (low expectation of volatility) is that simple noise can take you out. And besides if you like the risk here, why wouldn’t you like it closer to the breakout levels? You would if you are a value investor like me and don’t like the risk-reward and whipsaw of chasing trends.

We are in the closing stretch of my current roadshow (Fixing Fixed-Income). Bond yields are likely to remain low for many reasons, one of which are global demographics and the other is the massive existing debt burden. As we age, we need our money to last longer and low real interest rates are a huge tax on incomes. And while rising stock markets help, they only really help the top third of the population that benefits from exposure. So the average person is doing OK, but the median person is increasingly worse off. The bottom half of people have little to no impact on the wealth effect, but are hurt most from low rates in retirement. The safe bond part of your portfolio is broken, perhaps permanently impaired. You will need to learn to get creative to enhance your REAL return on your fixed-income and gold is part of that way of improving your portfolio.

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