Brian Stutland: “Why the options market is telling you to buy gold” CNBC

Posted on :Sep 06, 2013

By: Brian Stutland

CNBC

September 6, 2013

The move higher in gold that we’ve seen over the past few weeks has been vicious, and there are two separate catalysts behind it. First of all, we have seen gold rally as a response to having been so badly oversold. Second, gold is bouncing because of fears of possible military action in Syria, which could affect the global macro picture.

Gold is a “safe haven” trade. And as we see a bit of a pullback in the equities markets, along with global tension due to Syria, gold has begun to rally and volatility in equities has risen. To add fuel to the gold fire, the decline of some emerging market currencies—especially the Indian rupee—has forced some EM investors to buy commodities or hard assets to get protection from their own weakening currency. Gold is the obvious choice for these investors, from retail (who simply buy more jewelry) to institutions (which add to their gold holdings and reserves).

Although fear has been rising in the broad markets recently, the CBOE Gold Volatility index (GVZ), which measures the price of options on the SPDR Gold ETF (GLD), is trading much lower than it was on June 24. Now, the GVZ gauges the amount of fear and/or greed and the gold market. So why is it down?

  Well, any pullbacks in the GLD are being met with put sellers. These are option traders trying to pick up income from option sales, and in exchange, they become obligated to buy gold at lower levels. These traders are willing to do this because they believe a floor has been made in the gold market.
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