This week started with a bang as risk assets continue to get a bid into Tuesday. It appears that the Big Macro Conveyor Belt turned back on.
We're also seeing some interesting technical developments coming into the gold space again. First, a 6 month daily chart:
After some weakness in Febrary, it has regained all the major moving averages and is currently breaking out of some significant price levels. If you squint hard enough, you can see an inverted head and shoulders formation, whose target would be around the 119 mark. There's also a big level of resistance at 113, and any fast run to that level would put us at the underside of a major trendline that was broken in January. Momentum is up, but I'd be a little cautious.
But that's not the interesting point.
Let's talk about GLD options. The value of options is the sum of two parts: intrinsic and extrinsic. The former is the "high ground," or the distance between the strike price and the current price of the underlyinig. The latter is the premium in the option. That is the premium option buyers are willing to pay because they think the risk of a fast move is very high.
Reread that last sentence. Notice that I didn't talk about any sort of direction! In option pricing models, we make very few assumptions with respect to direction. However, the general rule of thumb is that if a stock price is falling, we will see premiums (extrinsic value) go up as "fear" comes into the options market.
I can think of two exceptions to that rule: when a stock gaps up huge on earnings and continues to run, it will see premium hold steady and get bid up. The other exception is GLD. Or it was until recently.
GLD options behave a little differently than equity options due to fundamental and sentimental reasons. GLD spiking can also be considered the "fear trade," as geopolitical risk comes into play in the supply and demand. We also see that in the options board. When we see a spike in GLD price, we also see a spike in GLD premiums as option traders "fear" an upside move.
A way to measure the supply and demand (premiums) for GLD options is through GVZ; consider it the VIX of gold:
The bottom pane shows GVZ, and I have a bollinger band on there to denote overbought levels in GLD premium.
Note that over the past 9 months, we have had a positive correlation with GLD premiums and the underlying price. The most recent spike, however, was on a significant drop in GLD.
What does that mean? Personally, I feel that the underlying sentiment of why to own gold is changing from a "fear" asset to a "reflation" asset. I also think that this is evidence that there could be a reduction in the long term momentum that GLD has seen-- this is supported by my technical thesis of a rangebound market until about May.