I have just finished reading the best financial book ever, and I have read most of them. It is The Ascent of Money: A Financial History of the World by Harvard professor Niall Ferguson. It gives you a great explanation of how the broad sweep of history delivered us to the doorstep of today’s crisis.

Ferguson starts with an ancient accounting system written on clay tablets in Mesopotamia 5,000 years ago and then takes us through the economic dominance of Greece and Rome. We learn about a medieval Italian diplomat named Fibonacci, who imported advanced mathematical concepts from the Middle East, which we still trade around today. He plots the rise of the great banking dynasties, such as the Medici’s and the Rothschild’s (Jacob was my neighbor in London).

It is also a pot-boiling narrative of the great financial scandals, starting with the Mississippi bubble, which wrecked the government of France, the South Sea bubble, where Sir Isaac Newton lost his shirt, to the Ponzi schemes of the 20^th century. The story tells us how the financial center of the world has migrated from Babylon to Cairo, Rome, Venice, Amsterdam, London, and eventually ended up in a hedge fund-dominated New York.

Ferguson is particularly astute in explaining in layman’s terms the borrowing binge and the exotic, super-leveraged derivatives that lead to the current crash. The author finishes with an explanation of how American overconsumption is financed by Chinese savings, and why this can’t last. If you are looking for a single tome that ties it all together, this is it. 

To obtain preferential pricing in the purchase of this book, please click here.

 

Opening Trade

8-1-2023

expiration date: January 17, 2025

Number of Contracts = 1 contract

The entire interest rate-sensitive sector has been walloped over the last three months over fears that the Fed will keep interest rates higher for longer. That is now in the price of the gold miners.

This position is a bet that our nation’s central bank will embark on a path of interest rate CUTS sometime in the next 18 months. And the shares of Barrack Gold (GOLD) only have to return to where they were in March for the position to hit max profit.

While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is a double in little more than a year. That is the probability that (GOLD) shares will rise over the next 26 months.

The logic behind this LEAPS is fairly simple.

After keeping interest rates too low for too long and then raising them too far too fast, what does the Fed do next? It then lowers interest rates too far too fast. In other words, a mistake-prone Jay Powell will keep on making mistakes. That’s what you get with a Fed chair who only has a degree in political science.

The rate of interest rate rises has been the most rapid in history and is possibly going to trigger a modest recession by end of 2023. When the recession hits, demand for money will dry up and interest rates will collapse. Yields on ten-year US Treasury bonds that bottomed at 0.32% in 2020 and reached a peak of 4.46% in October will easily fall back down to 2.50% by the time this LEAPS matures.

And guess which asset class is one of the most sensitive to falling interest rates? That would be precious metals, especially gold. A drop in interest rates of this magnitude should allow the price of Barrick Gold to double. That’s where we were in March of 2021 when (GOLD) traded at $30.

Another factor driving down interest rates is the fact that the US government budget deficit is shrinking at the fast rate in history, down from $3 trillion to $1.5 trillion in the past year. A shrinking supply of bonds brings higher bond prices and lower interest rates.

I am therefore buying the Barrick Gold (GOLD) January 2025 $20-$22 out-of-the-money vertical Bull Call spread LEAPS at $0.46 or best.

Don’t pay more than $0.80 or you’ll be chasing on a risk/reward basis.

Barrick Gold is the world’s largest gold miner and is the end result of a long series of mergers and acquisitions. It is based in Toronto, Canada and has 16 mines in 13 countries producing 5 million ounces of gold and 400 million pounds of copper per year. Gold and copper are often found together. Its average production cost for gold is $834 compared to today’s spot price of $1,713. That gives Barrick Gold enormous upside earnings leverage when gold prices rise. To learn more about Barrick Gold, please click here.

Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.

Let’s say the Barrick Gold (GOLD) January 2025 $20-$22 out-of-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $0.10-$1.00, which is typical. Enter an order for one contract at $0.20, another for $0.30, another for $0.40, and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.

A lot of people ask me about the appropriate size. Remember, if the (Barrick Gold) does NOT rise by 31.57% in 18 months, the value of your investment goes to zero. The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work, you double your money, and if only three of ten work you triple your money.

You never should have a position that is so big that you can’t sleep at night, or worse, need to call John Thomas asking if you should sell at a market bottom.

There is another way to cash in. Let’s say we get half of your 31.57% in the next six months, which from these low levels is entirely possible. Then you could earn half of the maximum potential profit in months. You can decide whether to keep the threefold return or go for the full ten bagger. It’s a nice problem to have.

Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.

Look at the math below and you will see that a 31.57% rise in (GOLD) shares will generate a 300% profit with this position, such is the wonder of LEAPS.

Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.

This is a bet that the (GOLD) will not fall below $22  by the January 17, 2025 option expiration in 18 months.

Here are the specific trades you need to execute this position:

Buy 1 January 2025 (GOLD) $20 call at………….………$1.70

Sell short 1 January 2025 (GOLD) $22 call at….………$1.24

Net Cost:………………………….………..........……….….....$0.46

Potential Profit: $2.00 - $0.46 = $1.54

(1 X 100 X $1.54) = $154 or 298% in 18 months

 

 

 

If you are uncertain on how to execute an options spread, please watch my training video by clicking here.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.

Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.

Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.

 

 

I love walking around Saint Marks Square in Venice.

You have five different bands playing classical music all at the same time, the musicians dressed in white dinner jackets. Couples holding hands are enjoying the high point of their lives, making out in every corner. African immigrants are selling odd flying toys. The line at the gelato stand is a mile long.

I’ve been doing this since 1968, and my grandfather before me in 1917, and every year it’s just as intoxicating.

Only the clouds of pigeons are gone from the old days, poisoned by the Commune of Venice out of existence. I guess they were a health hazard.

The three-hour bus trip to Cortina d’Ampezzo was nothing less than hair-raising. The driver tore along roads that were maybe four inches wider than the bus, with precipitous 500-foot drops over the side. As we rose into the Dolomites, the scenery became increasingly impressive.

There used to be a cog railway that made this route the famous “Blue Train.” It was torn down in 1963 when it could no longer compete with the automobiles of a rising Italian middle class and is now a bike path. When this happened in Switzerland the government poured in massive subsidies to keep the trains running, which are now major tourist draws.

Once in Cortina, I checked into a suite that Earnest Hemmingway occupied for several months. He left behind a battered Royal portable typewriter which I used to send you a trade alert. Hopefully, some writing skills rubbed off on me.

I made the pilgrimage to Cortina to find the grave of my great uncle, a first lieutenant in the Italian army who died here in WWI. I hired a guide who took me along the front lines, and we picked up spent bullets and rifle parts at every turn. Abandoned telephone lines and barbed wire still dangled from the trees after 106 years.

On another day, I made the pilgrimage to the top of Little Lagazuoi, a massive 2,000-foot stone edifice turned into a fortress by the Austrian defenders. It is riddled with miles of tunnels so they could fire down on the Italians with devastating effect. Two reenactors dressed as Austrian and Italian soldiers gave me some local history and even let me inspect their guns.

After a week my story had gotten out and the whole town was looking for the grave of my lost lieutenant. But no luck. Out of one million Italian soldiers lost in the Great White War there we only 10,000 graves. The rest are missing in action.

On my free day, I decided to climb the most challenging of the surrounding Dolomite peaks, the Grand Torri of the Cinque Torri, or “Five Towers”. My guide interviewed me carefully first to make sure I was not just another American who had gone insane and was going to take him down with him.

My experience?

The Matterhorn seven times, Mt. Fuji in Japan four times, Mt. Whitney in California twice, and oh yes, Mt Everest, but only up to 22,000 feet where I ran out of oxygen. “Then let’s climb the Grand Torri,” said Stefano, my guide, with enthusiasm.

I have not engaged in technical rock climbing for 50 years. But it’s just like riding a bicycle, you never forget, right? Well, maybe. One problem is that I had gained 40 pounds since the last time I climbed.

Two hours later found me outfitted with a helmet, harness, and a heavy 80-foot rope clinging to a bump the size of a grape on a shear limestone face 200 feet off the ground. Stefano shouted that there was a better handhold a meter to the right. I couldn’t see it because of the curvature of the mountain face, so Stefano said “Jump”. Jump I did, and miraculously my bare hand caught the alleged outcrop.

The really hilarious thing is that while I was doing this a crowd of hikers accumulated at the base. Every time I made a death-defying leap they applauded and shouted “Bravo.”

How embarrassing!

After nine pitches we made it to the summit. I took plenty of pictures and videos along the way. But to do so I had to hold my iPhone 14 pro in my teeth while I switched from holding the rope with my right hand to my left. At a certain point, I decided I had enough video for the day and quit while I was ahead of the game and still possessed a phone.

Getting down was yet another challenge. Abseiling requires quite a leap of faith as you must lean back perpendicular to the mountain and then walk down backward as Stefano paid out a rope. One slip can lead to disaster. But an hour later I was back at the bar sharing a celebratory beer with my guide.

The next day, I rented a car and drove across the Italian Alps on the narrowest roads imaginable. But that is a story for another day.

TO BE CONTINUED.

 

 

Sending a Trade Alert from Earnest Hemingway’s Typewriter

 

 

 

WWI Italian Bunker

 

Spent Austrian Bullet

 

Rifle Inspection

 

Machine Gun Nest

 

My Guide Stefano

 

Was this Such a Great Idea?

 

Made it to the Top

 

The Celebratory Beer