Time to Play Gold -- But Not the Way You're Thinking

 | Feb 15, 2018 | 9:00 AM EST
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The hoopla over bitcoin and other cryptocurrencies has distracted from gold's traditional role as the "alternative store of value" to fiat-based money. Bitcoin's sharp rise, and subsequent plunge have shaken out some of the new enthusiasm for those non-traditional investment plays.

As of Feb. 10, 2018, gold sold for about $1,316 per ounce, not too far from its two-year high.

The SPDR Gold ETF (GLD) has tracked actual gold pricing very closely over the past couple of years. Like the metal itself, GLD trades just shy of its past 24-month peak. It's been a reliable way to play but offers no edge to traders wishing to bet on the next run higher.

Closed-end fund ASA Gold and Precious Metals (ASA) has been around for decades yet is little known and under-followed. Long ago ASA functioned as GLD does today. It was used by traders as a proxy for playing on the price of gold.

These days, average daily volume has shrunk to about 108,000 and the shares don't always track gold prices as closely as they used to. That discrepancy can provide excellent trading moves for those who keep tabs on ASA's share price versus its actual net asset value (NAV).

Unlike GLD, which is near its 24-month peak, ASA closed on Feb. 9, 2018 at $10.42. That was within 2.3% of the $10.19, 52-week low (set last Friday) and 6% above it fleeting December 2016 nadir.

Those who bought ASA near the $10 mark since 2016 have had numerous chances at 20% to 75% gains. They've never had to wait more than a few months to reap their profits either.

Why did ASA provide more opportunity than GLD? ETFs generally sell for very close to their true NAVs. Closed-end funds like ASA, though, can vary widely from true liquidation value due to market conditions and psychological factors.

ASA's NAV dipped only 5.07% from year-end 2016 through Feb. 9, 2018. The shares fell by 22.3% over the previous 375-days. That means today's investors are getting $11.97 in net assets for only $10.42 per share, a 12.9% discount.

Discounts on closed-end funds are not uncommon. Discounts greater than 22%, however, rarely occur. Value Line notes that during the five years stretching from 2010 through 2016 ASA's average discount to NAV ranged to as low as 6% and never exceeded 8%.

The last time ASA fetched less than 80% of NAV came in January 2016 when its discount tallied (-20.7%). I was a buyer of ASA back then south of $7 per share. Less than seven months later the shares hit $17.50.

I am not a "gold bug" who thinks the metal can only go up. I do believe there will always be enough fluctuations to effectively trade ASA when you buy into it intelligently, when it's cheap.

ASA is a low-risk holding. It carries no debt, has no preferred shares and has no defined benefit pension plan. It currently pays a small semi-annual dividend of $0.02 per share. It functions as a trading vehicle that is not tied to "stocks" in general.

The fund's large discount to asset value makes it especially attractive right now.

Option sellers can play ASA by shorting some of its Aug. 17, 2018, expiration date puts at $10 or $12.50 strike prices. Worst-case, forced purchase prices drop to about $9.40 or $10.15, respectively, based on last week's closing prices.

ASA hasn't been under $10 since the very early days of 2016. It spent most of the previous couple of years churning between $11 and $14.

Maximum profits on these, or any other option sales, would be limited to keeping 100% of all premiums received upfront. The worst-case scenarios on these examples would be owning shares near, or below, ASA's best entry points of the past 23 months.

Buy some ASA shares, sell some Aug. 2018 puts, or consider doing both.

This commentary originally appeared on Real Money Pro on Feb. 14. Click here to learn about this dynamic market information service for active traders and get daily columns like this from Paul Price, Tim Collins, Doug Kass and others.

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