Central banks have been quietly stockpiling gold at an alarming rate. In the third quarter, a record 400 tons moved into government reserves.
Central Asian countries led the way with Turkey, Kazakhstan and Uzbekistan aggressively buying the metal. The last time central banks held this much gold was in 1974, after Bretton Woods was dissolved, unpegging gold from the dollar.
Heavy buying may come as a bit of a surprise considering gold has had a lackluster year, with the price virtually unchanged. Nevertheless, this has much more to do with U.S. dollar strength, as opposed to the metal's weakness.
With central banks looking for alternatives to the dollar, and some countries increasingly using gold to avoid sanctions and transact with Russia, the metal is starting to shine once again.
Generating Yield On Gold By Selling Puts
Gold works as a great store of value and has demonstrated long-term protection against inflation. Buying a small amount of the metal as a diversifier in a portfolio is always smart. An alternative for investors who are looking to generate income is selling puts on SPDR Gold Shares ETF.
With GLD ETF trading around 167, investors who expect buoyancy in the metal can consider selling the 165 put with a Jan. 20 expiry. This currently generates a credit of $2.05, which equates to a maximum profit of $205 if SPDR Gold Shares ETF is trading above 165 on expiry.
The Jan. 21 put currently has an implied volatility of 15.5%. This is on the lower end; an IV percentile of 35% or less is generally not ideal for selling options. Nevertheless, there are signs the options are still expensive because realized volatility has been even lower, at 14% over the last six months. While volatility should pick up with a much-awaited Fed meeting and CPI this week, it is likely to once again calm down over the Christmas season.
Risk To Traders If GLD ETF Falls Below 165 At Expiry
In an ideal situation, the price of gold remains buoyant and investors could continue selling puts monthly to generate income. However, if the price of the GLD ETF falls below 165, investors will be assigned the shares on expiration.
For those looking to buy the metal at a slight discount to current prices, this could work out conveniently. These investors could then hold the metal or continue to generate income by selling calls. However, investors should be aware that selling put options — akin to buying shares — has unlimited downside risk, and should manage exposure accordingly.
Gold has been showing signs of strength, with the GLD ETF trending higher and pushing up against its 200-day moving average the past four weeks.
