Gold keeps rising to record after record. How to play it from here with options

Gold is at a new record around $2,610 per ounce — more than ten times the low of just over $253 per ounce in 1999. For 2024, the U.S. government is set to spend a record $1.2 trillion on interest payments, surpassing military spending for the first time. These developments are likely related. Here’s how to trade it from here using options. Gold is often seen as a haven, benefiting from economic and geopolitical uncertainties. It has a low correlation with other asset classes. Carter Braxton Worth of Worth Charting pointed out on CNBC’s Fast Money recently that, except for one instance, gold has been higher during all significant S & P 500 declines of over 20%, highlighting its role as an uncorrelated hedge. @GC.1 ALL mountain Gold futures, long term Physical gold holders typically retain their assets through market fluctuations. This reluctance to sell during volatile periods can reduce gold’s correlation with other assets, which tend to become more correlated during market stress. The fundamental case A notable exception has been Saudi Arabia, which has historically acted as a liquidity source by buying gold when prices fell and selling as prices rose. Recently, however, Saudi Arabia has continued buying even as prices increase. This is intriguing given the country’s role in cementing the dollar as the global reserve currency and its former status as the largest oil producer (now surpassed by the U.S.). In 2023, central banks purchased 1,037 metric tons of gold, with China buying nearly 225 tons, the largest amount since 1977. Central bank purchases in 2024 have also been strong, with the first quarter ranking fourth in the past two years. For context, a metric ton (1,000 kg) is approximately 1.1 times a U.S. ton. Gold is commonly quoted in ounces, but central bank purchases are usually reported in metric tons. Despite these strong fundamentals, gold might be slightly overbought. Over the past 20 years, its average 30-day return has been nearly 79 basis points, but this drops to around 37 basis points when the 14-day RSI exceeds 70. As of Friday’s close, the RSI was 69.147, suggesting a short-term overbought condition. (1 basis point equals 0.01% and RSI stands for Relative Strength Index, a commonly used measure of momentum.) The trade As an alternative to buying gold directly, one could consider purchasing a longer-dated call option and selling a nearer-dated strangle to offset decay on the SPDR Gold Shares (GLD) , which tracks the price of gold. GLD YTD mountain SPDR Gold Shares, YTD This strategy carries the risk of potentially having to buy GLD at a strike price slightly below the current price — around 5% lower — but declines of more than 5% in gold over 30 days are rare, occurring less than 10% of the time. The term structure of volatility in gold is quite flat — whereas, in normal market conditions, longer-dated equity options will tend to trade at a premium to shorter-dated options in volatility terms except around catalysts such as earnings. The trade : Sell Oct. 18 GLD $228 put Buy Jan. 17 GLD $240 call Sell Oct. 18 GLD $255 Call All else equal this should improve the “standstill” performance of the strategy (how the option trade will perform in the event the underlying is little changed between now and October expiration). DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.