Gold as a hedge against Trump’s Border Tax

Talk of a “border adjustment tax” has gone from the sidelines to center stage in Washington, which has a lot of people asking: What is it exactly?

Currently, U.S. corporations are taxed on their worldwide profits at 35 percent. The House GOP plan would change that radically. The new tax formula would tax domestic revenue (minus domestic costs) at a much lower rate of 20 percent. The net effect would be one that favors exports over imports.

The change would convert the country’s tax system to a “territorial” system rather than a worldwide tax system. It’s meant to create incentives for domestic production because companies also would no longer be able to reduce their taxable income by deducting their overseas expenditures.

The plan would essentially subsidize exports and lead to a 20 percent tax on imports for corporations.

Retailers are very opposed to a border adjustment tax because a large percentage of the products they sell are imported. The end result is Americans will pay higher prices for consumer goods including imported fruits and vegetables.

Now economists who support the tax say the policy would lead to a sharp rise in the value of the dollar. As a result, retailers’ costs will go down so much that it will be a wash to consumers. However, many CEO’s worry whether the economists are right in that assessment.

In the past, gold and gold stocks have been used by money managers to hedge against inflation, currency risk and world chaos. For years, financial advisors recommend having 5% to 7% of your portfolio in gold or gold stocks.

Unfortunately, we have been living with deflation so gold as an investment has not performed very well over the past five years. The chart below compares three ETFs – gold bullion GLD, large cap gold miners GDX and junior gold miners GDXJ

gold

The border adjustment tax could change all that. It could cause mayhem in world trade, leading to higher inflation and extreme volatility in currency markets. The chart below illustrates the 2017 year to date price movements in the above mention ETF’s

gold-1

The biggest risk to owning gold or gold stocks is if the Fed’s interest rate policy changes and they are more aggressive in raising rates. This could cause the value of the U.S. dollar to increase which would be bad for gold.

Fed watchers believe that the June meeting would be the earliest date for an increase in interest rates. The stock market has only priced in two rate hikes for all of 2017. President Trump’s immigration ban and talk on renegotiating trade deals will be in the news for the next few months making investors nervous.

I am considering three short-term trades in gold

  1. Dollar cost average: Buy 300 shares of GDX  at 24.50, Sell 3 Apr 26 call options for $1.20 & Sell 3 April 24 put options for $1.50 (Total investment = $6540.00 U.S.) 
  2. Covered call: Buy 100 shares of GLD at $116.20, sell 1 April $118 call for $2.25 (Total investment $9,370.00 U.S)
  3. Call spread: Buy 5 GLD April $110 calls for $7.10 & Sell 5 GLD April $118 calls for $2.25  (Total investment =$2,425.00 U.S.)

 

The problem with using options in these trade choices is the VIX that measures volatility is quite low. Having to wait until the April 19 expiration date reduces the profit potential. That being said, I think that the first trade is less risky, if I am wrong on the direction of the price of gold. I would own 600 shares of GDX at an average price of $ 22.90 but could then sell more call options.

Do you own any investments in gold stocks or gold ETF’s?

 

Disclaimer: These are not recommendations, please do your own research before investing.

 

 

 

 

 

 

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9 thoughts on “Gold as a hedge against Trump’s Border Tax

  1. I do own GDX , GDX covered calls and puts.
    Just this weekend, I was thinking to add more puts to my portfolio to account for the ITM covered call. I might roll that one and add a put at the same strike as the call. The option premium would offset potential sell and buy costs. When the stock runs away from the strike, I collect the premium.

    From the 3 options, I prefer option 1 the most, then 2 and then 3. Why? option 3 will cost a lot of money when gold does not go up.

    Liked by 1 person

  2. A non option fund strategy, 12% gold bullion, 44% fixed income balanced fund(s), 44% low to moderate risk equity fund(s). This strategy would show very low variance with high risk adjusted returns over the last 25 years. What you get I a low to moderate risk profile with very little variation with either risk or return when viewed in 5 year increments over last 25 years.

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      • This was not a hypothetical, this was real past 25 years using specific funds that fall in the category and % described. They are full blown advisor managed funds with standard MER’s and the strategy actually has worked like a charm, there is nothing ‘may’ about it.

        The key is having the knowledge to pick the correct funds and in the correct % and have the courage and conviction to believe in the strategy and stay with it.

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  3. My rule for options is to only trade in underlying securities that I would be okay buying and holding long term. GLD and GDX do not fit that bill and it’s not even close.

    Now let he who is without sin cast the first stone and I admit that I have played in my fair share of yellow metal coin flipping contests under the guise of “investing”.

    So I’m not here to judge. Just some commentary now that I’m older and wiser:

    Gold costs you money to own it and, despite its reputation is not actually that good of a hedge against inflation or zombie apocalypses as, say, arable land.

    Gold miners, to put it bluntly, suck.

    Those lessons were learned the hard way, so I’m a little preachy about it. Apologies in advance for any ruffled feathers and good luck with whichever trade you choose.

    From Josh Brown:

    http://thereformedbroker.com/2011/11/02/memo-to-david-einhorn-re-gold-miner-suckitude/

    Liked by 1 person

    • No need to apologize, ruffle my feathers anytime. I am always looking for different points of views. I still have a 20 ounce bar of silver that I bought at $34 U.S. to remind me of a really bad investment.

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