by: Hard Assets Investor
October 12, 2010
By Brad Zigler
To say that gold traders are on tenterhooks awaiting the Fed minutes today would be akin to saying that the New York Yankees don’t care who they’ll face in the upcoming American League pennant series.
Of course, traders are nervous. They’re more nervous now than they were at the height of the baseball season, judging from the insurance premiums they’re willing to pay to hedge their gold bets.
This month, the cost of gold puts has shot up beyond the level seen during late July’s bullion sell-off.
Puts are option contracts that accord their owners the right to sell gold, gold futures or gold trust shares at a fixed price, no matter what the asset’s market price may be. Holding a put is the equivalent of having homeowners insurance -- during the life of the contract, it protects you from catastrophic loss.
COMEX Gold Futures vs. Gold Insurance Cost Index
Rising costs for insurance, as with any marketplace, indicates increased demand and/or tightened supply. The worst time to buy insurance is when everybody else is competing for coverage. Think of how much you’d pay for a Florida policy if you heard the National Hurricane Center issues warnings for your area.
Gold traders are now paying up for price protection in the option market. And why not? The gold market has been overbought over the past month and there have been recent wobbles in the SPDR Gold Trust Shares (GLD) bullion inventory and money flows. GLD is a weather vane for gold investment demand.
Storm clouds are piling up on the gold coast and many traders are scrambling to hedge away risk. We’ll soon find out if the heightened cost was worth paying.
Disclosure: No position
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