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How to Trade Gold After the EU Debt Deal

Friday, 22 Jul 2011 | 12:32 AM ET

Gold prices fell below $1,600 an ounce on Thursday after EU leaders agreed to a new bailout for Greece. But with crucial debt talks in the U.S. still unresolved, it may not be over yet for the gold bulls.

Gold
Anthony Bradshaw | Photographer's Choice RF | Getty Images
Gold

Experts say now could be a great time to invest for those who want to trade the uncertainty.

"Now, I think, is a particularly interesting time, it's fascinating," says Simon Ho, executive director of Triple 3 partners, an investment firm that specializes in options.

Ho believes that if the U.S. approves an increase in the debt ceiling, gold prices could drop swiftly as investors take profits on the precious metal. On the other hand, if a deal is not struck, Ho says prices could just as swiftly surge higher as investors panic and look for safe havens.

Ho is advising investors who hold gold to buy put options to protect them from any downside. He recommends buying puts 2.5 percent or $40 below current spot gold prices. Buying the August 19th options would give investors protection for a two-week window after the August 2nd debt ceiling deadline, Ho says, noting that the contracts cost just $14.

"We think that's particularly good value for someone who's got gold holdings; if it spikes, they enjoy the move up, and if it falls, they are protected from that point," Ho adds.

Others say any selloff would be only short-term as a debt deal would only kick the debt problems further down the road.

"The selloff - as has been the case virtually every selloff over the last 10 years - I believe is a buying opportunity," says Warren Gilman, CEO and Chairman of CEF holdings.

Some fund managers believe investors should look beyond gold ETFs and options and buy gold mining stocks, which have so far underperformed the precious metal.

"What we have at the moment in the gold market is that supply is very inconsistent with demand trends," says Matthew Hegarty, Senior Equities Analyst at Global Value Investors. "There's just not enough supply, there's not enough production growth coming to support demand."

Hegarty says the firm recently added Newmont Mining , the world's second-largest gold producer based on reserves, to their portfolio. The stock has fallen about 4 percent since the start of the year, while spot gold prices have risen 12 percent. Hegarty says the firm is extremely efficient in its mining operations.

"They're very much ahead of the cost curve…so it's very positive for their profit margins," he says.

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