Gold Prices Are Headed for New Highs Amid Unrest. What Investors Should Do.

As America burns, gold shines.

The traditional feel-good asset in times of economic duress is nearing a 52-week high as protests continue to erupt across the nation in response to the recent death of George Floyd while he was in police custody in Minneapolis.

Ever since, protesters have taken to the streets in major cities, including New York, Chicago, Portland, and even outside the White House in Washington, D.C. And in some cases, the gatherings have turned violent.

So far, the financial markets have mostly shrugged off the protests. Major stock indexes are still advancing, but there are emerging signs in gold trading, and even with the Cboe Volatility Index, or VIX, that some investors are preparing for more difficult days.

The SPDR Gold Shares (ticker: GLD) exchange-traded fund was recently around $163.66. During the past 52 weeks, the ETF has ranged from $123.90 to $164.96. The fear gauge, as VIX is widely known, normally moves in the opposite direction of the stock market but has stayed at elevated levels even as stock prices advance. The unusual VIX movement suggests that investors are buying defensive puts to hedge against a decline in stock prices.

In the options market, investors have amassed GLD ETF call positions in September 2020, likely positioning for volatility to tick higher in one of the most tumultuous months of the trading year. Major stock market corrections have occurred in October, and that makes September a month of psychological dread and whippy trading.

A few weeks ago, an investor bought 10,000 GLD September $180 calls and sold 20,000 September $200 calls. The “ratio spread”—this entails selling more calls than are bought—suggests the investor is positioning for the ETF to soon rally to $200.

Such a move would certainly be extraordinary in such a short time. If it occurred, the ETF would be trading at the highest price in about 12 years.

Investors who are intrigued by the dour trade can consider a more conservative strategy.

With GLD at $163.66, the September $165 call could be bought at $6. If GLD is above $171, the call purchase begins to generate profits. At $180, for example, the call is worth $15.

To be sure, GLD is always a strange creature to trade. Most equities normally evidence a bullish or bearish bias in the options market. This means that bullish calls or bearish puts are usually more expensive, reflecting investor demand. But GLD’s options tend to always indicate a bullish bias and a bearish bias. The peculiarity reflects the always passionate debate about the true value of gold. In some ways, the polemics are ultimately academic.

We know investors are concerned about the global economy, civil unrest, and the future of monetary policy. All of that leads them to gold, which should bode well for anyone who is positioned into the historically volatile fall trading months.

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Originally Posted on June 2, 2020 – Gold Prices Are Headed for New Highs Amid Unrest. What Investors Should Do.