BENZINGA RADIO: Exclusive Interview with SAM KIRTLEY of SKOPTIONSTRADING

Following the publication of our recent research into the behaviour of gold both intraday and overnight, Benzinga Radio very kindly gave us the opportunity to discuss this phenomena via an exclusive interview with Sam Kirtley, which we hope that you find both interesting and informative.

Sam Kirtley first presented the short intraday / long overnight gold trade that has yielded astounding returns since 2001 in two articles: one posted in August 2010 and the other earlier this month . We spoke with him to get further insight on the trade and the new fund that SK Options Trading has in the works. 

In 2010 you first presented the idea of an overnight gold fund, citing your calculations that a $100 million hedge fund, starting in 2001 and going long gold on the PM to AM fix and short on the AM to PM fix, would be worth 2.6 billion dollars today. Talk to us about how you discovered this trade and what you have found out.

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When Will Silver Reach a New High?

By Andrey Dashkov, Casey Research

In last week's Metals, Mining, and Money from Casey Research, Jeff Clark estimated that given the magnitude of the correction that started last September, it may take until May 2012 for gold to reach a new high. Let's take a look at how long it may take for silver to rebound.

It's a commonly known fact that silver is more volatile than gold. Already in this decade, silver has risen by a factor of 12 from its ten-year low ($48.70 vs. $4.07), while gold has seen about a sevenfold climb ($255.95 vs. $1,895).

This volatility – as you'll see in a minute – holds for corrections as well. On average, silver's retreats have been deeper and longer than gold's. The three big gold corrections we looked at last week averaged 22.8%. Take a look at the three biggest for silver, along with how long it's taken to recover and establish new highs.

(Click on image to enlarge)

The three biggest silver corrections in the current bull market average to 42.1%.

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What Does A Flattening Yield Curve Mean For Gold?

In this article, we look to analyse the relationship between gold and the U.S. bond yield curve. The yield curve is an immensely useful economic indicator and hence can be used as one of the determinants of the gold price.

We have previously covered yield curve dynamics, for a refresher the following excerpt should aid in comprehension of this article.

“For those readers who may be unfamiliar with how the yield curve works, we will provide a brief explanation. Bonds of different maturities have different yields. By plotting these yields against their maturities we can build a yield curve. The yield curve becomes steeper if longer term interest rates increase relative to shorter term interest rates. The yield curve becomes flatter if longer term interest rates decrease relative to shorter term interest rates. One way to measure the steepness of the yield curve is to look at the difference between the yields at two different points on the curve. For example one may look at the difference between the yields on 2 year Treasuries compared to the yield on 5 year Treasuries. Such a comparison will often be referred to as “2s5s” and is measured in basis points (bps) by subtracting the shorter term yield from the longer term yield. So if one says “2s5s are trading at +225” this means that the yield on 5 year bonds is 2.25% higher than the yield on 2 year bonds. If 2s5s go from +225 to +275 then the yield curve has steepened between those two maturities. If 2s5s go from +225 to +175 then the yield curve has flattened between those two maturities.”

Intuitively, one would expect a flattening yield curve to be bullish for gold. Flatter yield curve = economic weakness = safe haven assets (gold) becoming more valuable, especially if such weakening in the economy is followed by monetary easing, or increased expectations of monetary easing. As with any hypothesis, this one is useless without being tested.

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2012: The Year Of Consequences For Actions

Jim Sinclair

The following is a missive that we received from Jim Sinclair a day or so ago, who is the host of a web site called Jim Sinclair's MineSet in our humble opinion its well worth the time spent on reading what he has to say. The above link will take to his site and his updates via email are free, so you have nothing to lose by signing up for them.

Dear Friends, 

2011 was a year of confusion among financial leadership, many conversations, much speculation, spectacular MOPE and no action. Europe almost talked the euro to death while the media carefully avoided the epic debt of Great Britain and the insolvency of US States.

2012 is going to be year of action and consequences.

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Revisiting Our Proposal for an Overnight Gold Fund

In August 2010 we wrote an article entitled “Proposing An Overnight Gold Fund” in which we explored the potential for launching a fund that held long positions in gold overnight and was short gold during the day. We pointed out that “a hedge fund starting in 2001 with $100m, with the strategy of being long gold from the PM to AM fix, and short gold from the AM to PM fix...would be worth $2.16billion today, before any fees and expenses.” We have been monitoring this trading strategy since then and therefore would like to take this opportunity to update readers on its astonishing progress.

Firstly we will introduce the thinking that led us to investigate this trading strategy. There is much debate within the precious metals industry regarding the alleged suppression, or at least manipulation to an extent, by either central banks or the proprietary trading divisions of large banks, or a combination of the two.

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SK Options Trading 2011 Report

Now that 2011 has drawn to a close we will take a moment to review our trades for the year. This report aims to summarise our trading strategies throughout the year, with full details given of all trades closed in 2011.

Skot 2011 Report

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Endeavour Silver Corporation Sets New Production Records in 4th Quarter and Withholds some Silver Production

Hugh Clarke

Today we were in touch with Hugh Clarke, VP Corporate Communications of the Endeavour Silver Corporation (EXK) regarding Endeavour's 4th Quarter results.

We were also particularly interested in the company's decision to withhold some of its silver and gold production from the market.

Hugh very kindly responded with the following comments:

“Once again, we’ve been able to meet or exceed our annual production goals. As a lot of your readers know, a number of the other silver producers were forced to reduce their targets for the year. Consistency and execution are difficult objectives in the silver mining business and Endeavour Silver stands out for its track record in meeting the expectations of its shareholders. 

We’ve employed the strategy of withholding our silver and gold from the market in the past, searching for and receiving higher prices for our metals. Our accumulation of silver and gold over the past 2 quarters is a continuation of this policy. We’re expecting higher prices during the early part of 2012 and hopefully we’ll be able to crystallize better prices during this period than were available in the latter part of 2011. We’ll provide guidance later this month and I can tell you that your readers can expect Endeavour Silver to achieve another year of record production of silver and gold at low cost in 2012.”

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In The First Few Days Of 2012, US Mint Sells More Silver Than In Most Months Of 2011

In the first few days of 2012, the US mint has already sold 4.3 million ounces in silver coins. This is more than in all individual months of 2011 except for January and September, when the mint sold 6.4 million and 4.5 million ounces. Is the retail love affair with physical silver coming back with a vengeance?

2012:

2011:

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Two Long/Short Pair Trades For 2012: DGP/GDX and GLD/TIP

By Sam Kirtley

SK Options Trading

Pair trading is a trading strategy based on the concepts of statistical arbitrage and convergence. Typically it involves being long one security and short another. For example one may believe that Apple would outperform Microsoft, so one buys Apple and shorts Microsoft. A pair trade may also involve two trading two markets that usually move close together but have drifted apart, for example the US and UK stock markets. If the FTSE has rallied strongly when the S&P has not, the trader may decide to short the FTSE and buy the S&P, taking the view than the US stock market will catch up to the performance of the UK stock market. Whilst our primary focus is on trading options, we have identified what we believe are two attractive pair trades for 2012.

Long GLD/Short TIP

The first of these pair trades is one based on convergence. Historically US real interest rates have an inverse relationship with gold prices, a relationship which we have written about frequently. The basic premise is that when monetary policy becomes more accommodative, US real interest rates decline and gold prices rise due to the ease in monetary policy. However over recent weeks gold prices have fallen but US real interest rates have remained low and this pair trade is speculating that the two will converge again.

To execute the trade we would use the gold exchange trade fund GLD and the iShares Barclays TIPS Bond Fund, although futures can be used as well. GLD tracks the price of gold and TIP tracks the price of Treasury Inflation Protected Securities. Since gold prices move inversely with real interest rates, it moves with the price of inflation protected bonds, since yield and price move in opposite directions in the bond market. This relationship is demonstrated in the chart below.

 

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Changes to our Calculations of PnL on Short Spread Trades

We are going to alter the way in which we calculate the percentage return on our spread trades, where the spread involved being short one option and long another. The aim of this change is to give a fairer representation of returns.

The type of trade this affects the most is vertical spreads, where we received a net credit for placing the trade.

We will use the first trade of this type to demonstrate the differences in the methodology.

In this trade we sold a vertical put spread on GLD.

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