With the renewed strength of the US dollar arising from eurozone fiscal problems, gold has retreated from its highs above US$1,200 per ounce in late 2009, to US$1,090 on Friday, a decline of about 8%.

This is instructive from a couple of perspectives. It tells us that despite serious problems in the US economy, the greenback is still the currency of last resort. When the chips are down or falling sharply, traders prefer US treasury bills to gold. And that, by extension, makes gold less important as crisis insurance.

As expected, the declining value of gold bullion has taken a lot of steam out of the gold mining sector. Stocks within this sector are down 24%, on average, from their highs.

The question of course is whether the rally in the US dollar is sustainable? Certainly you can argue that the first wave into a defensive position would be US treasury bills. But if the euro crisis abates – even a little – the US dollar will likely retrench. That too is instructive, because it may be telling us that the real, perhaps only, value in the greenback is crisis insurance. A moniker has not been particularly helpful to gold aficionadas over the years. And probably won’t do much for the American psyche either.

In time, like any financial market, traders seek out relative value. And there is no exception for the US dollar… at least not without a crisis. Focus on America’s fiscal problems, and the valuation is not… well, relative.

Those pesky trillion-dollar deficits as far as the eye can see, and a debt-to-GDP ratio at 90% and climbing. Sooner or later that will cause the greenback to pause which will lead to a rally in gold. More importantly, a significant rally in gold stocks, because of course, they are highly levered to the price of gold.

Normally one might think of buying calls on these stocks. But for a couple of reasons, that may not be the right choice. First of all, options on gold stocks tend to be expensive. And secondly, option buying requires an acute sense of timing. Challenging in any market, but of particular importance when trying to time moves in the gold sector.

Because of that, I prefer option writing strategies when trading gold stocks. Particularly on stocks like Barrick Gold Corp. (TSX: ABX, recent price $38.74), Goldcorp Inc. (TSX: G, $39.35) or Kinross Gold Corp. (TSX: K, $19.30).

With ABX, take a look at buying the shares and writing the March 40 calls at 1.20. The one month return if exercised is 6.6% and the return if unchanged is 3.2%. Similarly, with G, buy the shares and write the March 40 calls at $1.65. The one-month return if exercised is 6.1% and the return if unchanged is 4.4%.

With Kinross, you might look at writing the March 20 puts at $1.47. If the stock is above $20 at the March expiration, you get to keep the premium received which represents a 7.4% cash-on- cash return. If the stock is below $20 at expiration, you will be required to buy the shares at $20 per shares less the $1.47 per share premium received from the sale of the put.