The global investor appetite to own gold and silver is so acute as to defy price sensitivity—a phenomenon rarely seen in markets.
Even though the SPDR Gold Shares and iShares Silver Trust exchange-traded funds have risen 68% and 156%, respectively, over the past year, investors are exhibiting behavior normally seen in put options during sharp market declines.
When investors are afraid or unable to make sense of what is happening around them, they buy puts with little to no regard for prices. Puts, which you can trade on major indexes and almost any stock, increase in value when the associated securities decline. Investors often feel better owning them because they can offset some of their stock losses.
This dynamic is traditionally considered to be a sign of irrational behavior—since investors tend to buy puts in a panic when prices are exceptionally high—but it has come to define the gold and silver markets.
Geopolitical concerns have become so intense that assets with physical qualities that can be deposited in vaults or held like trauma dolls are now more highly valued than nonphysical assets such as stocks, options, and Bitcoin. Over the past year, gold and silver have dramatically outperformed the S&P 500. The benchmark index for the world’s leading stocks is up some 18%, an historically strong return, but it compares anemically to gold and silver.
The extraordinary appeal of precious metals was on display when markets opened for the first time since Venezuela’s president, Nicolás Maduro, was arrested in his own country by U.S. forces. On that day, the S&P 500 gained 0.67%, but SPDR Gold Shares rose 2.6% and iShares Silver Trust rose 5%.
Hot price performance normally prompts investors to take profits. They reason that the amount of money earned is so extraordinary that it is unlikely to continue. They tend to sell and buy securities with better opportunities to make good returns. Yet normal reasoning has ceased to define gold and silver, a fact that has been exacerbated by how investors are viewing global politics, especially in the post-Maduro age.
Concerns now exist that China could feel emboldened to invade Taiwan, citing President Donald Trump’s Venezuela operation. The same could be true for a Russian operation to destabilize Ukraine’s political leadership.
For investors who want to buy gold and silver, but who hesitate to buy when prices are around all-time highs, the best approach might be an options strategy that monetizes fear to harness greed.
By selling a bearish put to buy a bullish call option, investors can edge into one of the hottest trades in global markets. Consider iShares Silver Trust as an example of how to structure the trade.
With the Silver Trust ETF at $73.71, investors could sell the February $65 put and buy the February $77 call for about $2.25. The risk-reversal strategy—that is, selling a put and buying a call with the same expiration but a higher strike price—positions investors to profit from advances and reduces the cost of buying a call by the amount received for selling the put.
The call is worth $10 if the ETF is at $87 at expiration. We chose a relatively short expiration to give investors the choice of adjusting the strategy each month to reflect market conditions.
Price declines are a risk, of course. Should the ETF fall to $65 or lower, investors must buy it at the put strike price or adjust the position to avoid assignment.
Still, bullish sentiment seems unusually robust. It is highly unlikely that any investor has reliable insight into Chinese and Russian geopolitical machinations, or even Trump’s next bold move. The lack of clarity means investor demand for precious metals should continue, and might even increase.