Bill Holter: A Fat-Tailed Put Option And THE ULTIMATE GOLD CALL

People see with their own eyes that currencies continually debase versus real goods like gold, yet people still think of gold as “risky”. Bill explains…

by Bill Holter of JS Mineset

If one offered investors a fat tail put option that never decays or expires, costs about -1% pa to carry, has no counter party risk & no chance of ever becoming worthless, there would be a line out the door. But when one explains that this option is physical gold… no interest.

–          S. Mikhailovich

The above quote has been atop   for over 6 months now.  Recently, several readers have asked “what does it mean and why has the quote remained for so long”?  With financial markets bloated and ready to implode without notice, let’s look at this very important concept and then expand on it as you will see.

First, what is a “fat tailed put”?  A put option is something speculators use to bet on downward movement, or hedgers use to protect long positions.  In this instance, the “put” happens to be against the financial system as a whole.  In other words, a put, or a bet/hedge against a systemic implosion.  A “fat tail” refers to something that begins to move exponentially the higher the sigma event becomes.  The worse the event, the greater the move higher of a fat tailed put in far greater magnitude.  Ultimately in a credit meltdown, owning gold will be the equivalent of owning “all the marbles”!

If you have any understanding of options, you know they have final expiration dates and whatever “time premium” that exists will continually decay until expiration day when the premium vanishes as no more time exists.  This is typically the problem with puts or calls, they have a final expiration date, you might be correct in your thought a market may move one way or the other but it may not happen within your timeframe.  If this is the case and your option expires, your speculation or your hedge is gone when the event takes place.  It is for this reason (premium decay into expiration) that the “writers” (issuers) of put and call options generally win something like 90% of the time.  Conversely, buyers of options normally lose 90% of the time because of the premium decay due to the passage of time.

Getting to the meat of this quote, the author is trying to tell you gold is THE ultimate put option to protect against a credit meltdown as well as many other possible negative scenarios which could affect the entire credit edifice.  Gold costs less than 1% per year to carry (store), it has no expiration date and it can never ever become worthless.  Most importantly it has no counterparty risk.  In today’s world where literally everything has liability (or promise) attached, gold has none.  No government or institution needs to guarantee gold.  For instance, when you purchase a bond, any bond, if the borrower fails to pay either interest or principal …you as the lender suffers.  Gold promises nothing.  Rather, it is “proof” labor, capital and equipment have already been employed to create the bar or coin in your hand.

The author finally points out, this type of put option with no time decay or expiration, AND no liability is the ultimate in protection …but because it is “called” gold, no one has interest.  Bluntly, governments and their central banks have psyop’d the populace for many years that gold is “risky” and bad, only their currency is safe …!  They have done a fabulous job from a psychological standpoint, though not so much from the standpoint of the actual performance of their currency as ALL have been debased and lost purchasing power over the years.  The fact that investors/savers have seen with their own eyes currencies continually debase versus real goods (and of course gold), yet still think of gold as “risky”, is proof positive how thorough government negative campaigns against gold have been!

So that pretty much explains the quote.  If you understand nothing else, knowing gold will be your life boat under nearly all possible negative systemic scenarios is critical.  Inflation/hyperinflation?  Gold.  Depression/deflation?  Gold  Negative currency or credit events?  Gold.  War/civil war?  Gold.  Simply, when anything of real substance occurs that is systemically bad financially or economically, because of gold’s characteristics (especially the non liability aspect), GOLD is THE safe haven.  This has been true for thousand’s of years and as you will see when the current credit bubble of historic proportions bursts …IS STILL TRUE TODAY!

OK, so the quote has been explained, “gold is the ultimate put option against a negative systemic event”.  If this is the case and I assure you it is, then what form of gold is best?  In this case, what gives you the most exposure to gold for your capital expended.  In plain English, what is the ultimate call option?  When TSHTF, what form of gold will give you the most exposure to gold’s “fat tail put” characteristic?  Let’s call it a FAT TAILED CALL OPTION!

This is actually quite easy and has been in front of you all along.  The greatest call option on gold is the mining company that has the most PROVEN gold ounces in the ground per share outstanding.  I thought about saying “economically feasible to mine” but this is slightly incorrect.  If cost to produce is currently $1,500 per ounce, then it’s not economically feasible today …but what happens when gold trades to $2,000 or many multiples?  It is this concept that explains the operating leverage of mining companies and why they are historically far more volatile than the price of gold itself.  Generally speaking, mining companies in production have 3 times the leverage or volatility to gold’s price.

But there is another sector of the mining industry with FAR MORE leverage than the producing miners …the juniors …and especially the exploration companies!  For example, there are many juniors/explorers out there that are valued at $20 (or less) for every ounce of proven gold they currently sit on.  These companies currently trade at a huge discount to the value of the proven gold their properties contain.  Let’s look at these from the standpoint of a “call option”?

The ultimate call option is a situation that gives you THE most exposure to gold for your capital expended.   Gold exposure that can be purchased at a discount (thus no premium) and does not expire unless the company bankrupts.  In essence, you are looking for  companies with the most proven gold ounces per common share.  In this instance, you have the most gold exposure for your capital expended.

To wrap this up, gold itself is a fat tailed put that offers outsized financial protection the worse things get.  Proven ounces in the ground, (owned by companies whose stocks are currently almost free) offers maximum leverage to gold.  Thus you have massive leverage upon the asset which offers the most protection to the financial meltdown mathematically certain to occur!  Call this the fat tailed call option on gold …which happens to be the fat tailed put option to a systemically bankrupt global Ponzi scheme.  …And without expiration!

Standing watch,

Bill Holter

Holter-Sinclair collaboration