Riding the Gold Wave in 2025
The rally, the risks and the art of exiting a winning trade
Let’s talk about Gold. It has been everywhere this year and 2025 has turned into a remarkable run for the metal.
I have written before about my exposure to Gold and about Agnico Eagle Mines (TSE:AEM / NYSE:AEM). Back then, the combined position was about 7.5%. It was a meaningful bet and, as it turns out, a very rewarding one.
So why did gold surge the way it did? As usual, it is never one clean reason. Concerns around global currency reserves have resurfaced. Central banks have become visibly more cautious about holding USD after the affair of confiscation of Russian USD holdings. When demand spikes in a short window and supply cannot keep up, you get a price chart that looks like this year’s.
For me, the good days were very good. Gold doubled on my base position and AEM turned into a three bagger. Put together, the two positions delivered about 3% worth of alpha on the overall portfolio! I really could not have asked for more.
But a run like this creates its own problem. Once prices detach from fundamentals, the narrative shifts entirely. With AEM for instance, the stock stopped reflecting the quality of management or the strength of the operations. Those factors feel like distant objects in the rearview mirror now.
The stock is simply a levered expression of the gold price. Every ounce the mine produces sells at a higher price, profits climb, and the market reacts in a perfectly mechanical way. In fact I noted this down in my AEM post in May 2024, well before the recent run up:
The company’s fortunes therefore vary significantly with gold price - and the share price bobbles up and down in a levered manner with the change in gold price. These 1 year, 5 year and longer term charts tell you the story of this relationship.
AEM expects to earn USD 8 this year, almost equal to what it earned over the previous three years combined. Even with that surge in profitability, the stock now trades at a frothy ~22x times earnings. Earnings went up, the multiple went up a bit as well, and the combination produced a triple. I had written earlier that the share price tends to bobble in a levered fashion with every move in gold. The past few months proved that point again.
Alongside AEM (4.6% holdings at last portfolio update), I held a 3% position in Gold directly through NYSEARCA:GLD Gold ETF. In total, a sizeable 7.5% of my portfolio was tied to the fate of the gold price. That is the real dilemma with a strong run. Traditional wisdom says to let your winners run for as long as possible. If you fear the downside, you set stop losses so you keep most of the upside while limiting the damage if things turn.
I tried that approach, but gold is volatile enough that stop losses are almost destined to trigger at some point. Once they do, you face the uncomfortable question. Do you walk away from the entire position?
You can also choose to stay invested and buy options as protection. At-the-money options cost about 10 percent of notional value for a year. That is not cheap, but it gives you a cushion while keeping your upside open.
There is a third path that sits in between. You use a stop loss, let it trigger, take the cash, and then redeploy a smaller portion of it into call options so you still participate if the asset keeps rallying. The remaining cash can find a home elsewhere or simply sit in the brokerage account earning a modest yield while you think about your next move.
I describe this manoeuvre with confidence because it is exactly what happened. In October, both my AEM and GLD stop losses were triggered and the entire position was liquidated. I replaced it immediately with GLD Jan 27 call spreads (415 over 515, for anyone interested) for a premium of 22 dollars. That gives me upside if gold continues its ascent. If it does not, then so be it. Life moves on.
With that note, Happy Investing!
Disclaimer: I am not your financial advisor and bear no fiduciary responsibility. This post is only for educational and entertainment purposes. Do your own due diligence before investing in any securities. I may hold or enter into, a position in any of the stocks mentioned above. The above is NOT a solicitation to either buy or sell the securities listed in this post.