Options Posturing Shows Gold Bulls Miss the Mark

Whether the FOMC actually announces the first increase in interest rates since June 2006 at its December meeting is a moot point. The money market believes it to be the case and investors may see slim chances of a reprieve from the November payroll report, keeping the wind beneath soaring bond yields. In turn, the dollar has responded positively on the promise of higher yields and as such, that’s depressing the price of gold – the typical arbiter of how safe investors feel around the world. Their attitude towards central bank policy and the perceived ability to contain either inflation or deflation is embodied in the price of the yellow metal. For years, gold bugs, disdainful of quantitative easing at a growing number of central bankers, pushed up the price of gold towards $2,000 per ounce. The lack of inflation as the policy unfurled stole gold’s thunder and the combined prospect of a Fed tightening and rising dollar sounded its death knell. Now that the day of reckoning is near, the price of gold is teetering on its July lows around $1,080 per ounce and down $100 since mid-October.

Chart – Open interest heavily skewed towards further upside

(click to enlarge)

The chart illustrates positioning in the options market for SPDR Gold Shares ETF (GLD), whose share price is marked with a dashed red vertical line at $104.08. The number of established call options in the upper half of the chart exceeds 70,000 contracts for around nine strike prices over time through a share price of $150.00. The last time shares in GLD traded at that price was April 2013. On the put side, there is not a single out-the-money strike with commensurate open interest. How little faith gold traders have in its price falling below $1,000 per ounce.

The analysis in this article is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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