Gold and Silver

If you have the slightest interest in investing then you will no doubt have heard about the new bull market in gold and silver. As you know, gold is often touted as the ultimate safe haven for investors. It has been used as a store of value for thousands of years. Silver — as well as also being seen as a way to protect your savings — has many industrial uses. Can we apply FIRE Revolution to gold stocks?

The Covid-19 crisis led to large drops in the stock market but the price of the two precious metals has soared. Gold recently broke through the $2,000 an ounce but has since pulled back a little. Silver is up almost 45% in sterling terms in the last 3 months alone.

And here is the important point, many commentators expect this rally to continue as the full extent of the response to the Coronavirus plays out. But, of course, these are volatile markets. There is always the possibility of a pullback. That may be making you nervous about jumping aboard.

FIRE Revolution

So, what if you want to buy into gold stocks but hedge your downside risk at the same time. Is there a way? Well, yes there is.

As you may know, the FIRE Revolution strategy uses cash-secured puts to enter stock positions at a price below the current trading price. Whilst at the same time, paying you to wait and see if you are going to pick up your shares ‘on the cheap’.

If we combine this simple strategy with a very well-known gold stock — Fresnillo Plc in this case.  We can combine the best of both worlds — a golden revolution if you like.

Fresnillo are one of the worlds largest Silver mining companies. They are also one of Mexico’s largest gold producers with six active mines. The London Stock Exchange lists the shares. That makes it a gold stock easily accessible to UK residents.

So, let’s have a look at how we can sell a cash-secured put on Fresnillo. Please remember this is not trading advice. I’m simply going to show you what’s possible.

As you can see from the chart, the shares have been on a tear over the last few months. They are now tracking sideways and closed on Friday at 1,262p each. This could mark a good entry point.

Now of course, as enlightened FIRE Revolution investors, we are not going to pay 1,262p for the shares. No, instead we would likely choose to sell a cash-secured put that obligates us to pay just 1,200p for the gold stock if triggered.

On Friday, we could have sold a cash-secured put that would be valid until the middle of October for 50p per share. In other words, we would be immediately paid 50p per share. And in return we are obligated to buy Fresnillo shares for 1,200p at any point up until the 16th October.

Pretty good eh?

Possible Outcomes

If the price of Fresnillo gold stock stays above 1,200p then we simply keep the premium — which, by the way, is equivalent to an annualised yield of  33% — and if the shares drop below 1,200p we get to pick them up at for 1,200p and we still get to keep the 50p premium we have been paid.

Or, to put that another way, if we do end up buying the shares then we will do so for 1,150p rather than the 1,262p they are currently trading for.

Either solution is a pretty good outcome in my book.

If, you are interested in learning how to master this sort of investment — and its close cousin, covered calls — then we you’ll be interested to know that we have taught dozens of happy clients exactly how to using a fully-supported online training programme.

Check out the course details here.

If you want exposure to some gold stocks using the FIRE Revolution. What have you got to lose?

Third Friday Ltd are not regulated by the Financial Conduct Authority and the FIRE Revolution training programme is purely educational in nature. Under no circumstances do we provide any financial trading or investment advice. Any examples used are for educational purposes only and should never be construed as advice. We accept no responsibility for any investment losses you may incur. Please consult a financial advisor or other qualified professional if you are in any doubt as to the suitability of the strategies we teach.