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Gold ETFs Rally Amid Quiet Options Activity

Gold ETFs Rally Amid Quiet Options Activity

January 9, 2018


The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products are off to impressive starts to 2018 as the yellow metal appears to be honoring a historical tendency to perform well in January.


Importantly, January is often one of the best months of the year in which to be long gold. Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs this year.


While gold ETFs are performing well to start 2018, options activity in GLD, the largest gold-backed ETF, is quiet.“Call open interest has rarely been lower over the past year, with the 1.92 million contracts currently open ranking in the 4th annual percentile. Plus, the bulk of this activity is centered at the deep out-of-the-money January 2018 190- and 200-strike calls, where 1.18 million and 1.10 million contracts are currently open, respectively,” according to Schaeffer’s Investment Research.


With the U.S. equity markets hitting record highs and market volatility as reflected by the CBOE Volatility Index hovering near record lows, George Milling-Stanley, Head of Gold Strategy at State Street Global Advisors, argued that investors should look to gold ETFs such as GLD as a staple asset of choice for a well diversified investment portfolio.


“Put options, meanwhile, are more popular than usual. GLD put open interest of 1.03 million contracts is ranked in the 79th annual percentile, compared to the 12-month high of 1.32 million puts open on Sept. 15,” according to Schaeffer’s. “Peak put open interest of 41,259 contracts is currently found at the June 105 strike. Data can’t confirm how these puts were used, but those selling the contracts are eyeing a floor at $105. Those purchasing the puts expect GLD to tumble to two-year lows by June. The ETF hasn’t traded below the strike since January 2016.”