Idea: How to manage reflationary risk using options.
Calls: SBSWApril162021 @ $17.50
Puts: IEFMarch192021 @ $118.50
I have already made posts and videos about the merits of both positions, but from a broader perspective, I wanted to point out the FX and inflation components.
-Differences between 2 country’s real rates + Real rate differentials (a country’s 2 year rate minus core inflation rate) has been number 1 driver of G20 country currencies over past decade.
-Right now US has a real rate of MINUS 230 bps – unlike 2016 post election period when BOTH inflation rates and 2 year treasury rates moved up – post 2020 election inflation has been ripping.
-BUT US 2 rates have actually gone down a bit AND they started at a much lower level around 15 bps vs 80 bps starting level in Nov 2016.
-Food prices and housing have been rising rapidly, along with many goods in CPI basket that have gone up in price but are not represented in the basket.
-The demand for physical metals is very high, and going higher from the electrification plans to the hydrogen economy, as well as current demand for catalytic converters will allows for a smooth transitions for PGM demand.
-The demand for 10-year bonds will drop with inflation, and gold and other metals will replace many fiat holdings.
-Bitcoin and other digital currencies will suck away capital from IEF and similar ETFs.
-Debt free and cash rich mining company gives a better cushion and returns vs just gold.
-In the event equities drop, gold revenues will prevent majors drops to SBSW.
-Strong macro tailwinds to support positions.
In order to avoid overloading people with information I will include the link to my videos/posts on IEF and SBSW.
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