Should I short gold to protect the physical gold already in my possession if I believe that the market is going temporarily lower? This would allow me to limit my losses without getting rid of my physical holdings. What's your take?
Yes, in our view hedging one's gold holdings is better than the direct sale of the yellow metal, because of the possibility that the derivatives markets' melt down, or any other financial turmoil could make purchasing more gold either impossible or illegal. Of course, the possibility of such a scenario is very low but taking the next several years or so into account, this scenario could play out.
If you owned physical hold and hedged it using speculative instruments, for instance options, and price of gold would soar due to derivatives' default, you would still have your valuable gold position that would become even more valuable because of the default. You would have a dollar loss, but you would not face the problem of not being able to buy gold as you would already own it.
On the other hand, if you sold your gold directly and the metal moved higher due to derivatives' default, you would have a very hard time if you tried to buy gold again, since the price would move up very quickly. Also take into account that during such turbulent times purchases of gold might be banned.
The point is - holding your gold protects you from the financial turmoil. By hedging your position instead of selling it, you remain at least somewhat protected even without the temporary lack of exposure to gold's price moves.
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