Which makes puts on GLD cheap. The cost of buying protection against a greater than 20% drop in the price of GLD over the next six months using the optimal put option contracts is about 1.1% of the position value. That’s about how cheap SPY puts were back when everything was sunny.
Will the bull market in gold (and GLD) continue to new highs? Probably. But I think there’s a decent chance it will take a breather within the next six months. There doesn’t seem to be much inflationary pressure out there, with the prices of industrial commodities such as copper and oil weakening recently, and persistently high unemployment (making a wage and price spiral decidedly unlikely).
Instead of buying the optimal puts to hedge against a greater-than-20% decline in GLD, I looked up the optimal puts to hedge against a greater-than-12% decline (I am betting against GLD here, rather than hedging, but I still wanted to find the least expensive put options for this bet). That turned out to be the $109 strike Dec puts, so I picked up a few of them today at $4 each.
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