Q: What is the big score, in theory, with gold market speculation?
A: The first approach is to buy and hold gold bullion. The results would be, in USD terms, a profit of $61,100 or 61.1 percent.
Another alternative is to invest in gold mining shares. On average, these are three times as volatile as the price of gold bullion. The profit would be $183,000 or 188 percent.
It is also possible to buy an exchange-traded fund (ETF) that owns gold mining shares, with three-to-one leverage, for a profit of $544,900, a 544 percent rate of return.
It is also possible to buy call options on the ETF shares. This can result in a further leverage of ten to one over owning ETF shares. The results are $5,449,000, or 5,449 percent.
And then there is pyramiding: reinvesting profits while gold is increasing from $1,000 to $1,611. In mathematical terms, this is simply compounding. When applied to a short-term speculation, it is called pyramiding.
To be conservative, let’s take out forty percent of the profits at each compounding point to decrease the maximum leverage from ninety to fifty times over the gold bullion price. If compounding is done just five times at each ten percent increase in price, the resulting profit increases from $5,449,000 to $312,000,000. If you compound at each five percent increase in the price of gold, which would mean that you compound ten times rather than five times, the profit is $953,000,000. And, needless to say, by the fourth year, you own all the money in the universe.
Market Commentary (above) by Arthur Fixed
[box type=”info” style=”rounded” border=”full”]Commentary from Arthur Fixed the author of the Art of Speculation during Civil War – Sun Tzu Meets Jesse Livermore is a private manuscript copyrighted 2012 by Art Fixed.[/box]
Photo credit: Steve Corey via Visualhunt.com / CC BY-ND
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