Digging Into Gold Options as an Insurance Policy

Distinguishing de-leveraging from quantitative easing.

His left hand is under my head,
And his right hand embraces me.
—Song of Solomon

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Sharon Epperson makes an interesting point about elevated open interest at the Dec. 2010 1500 call strike in gold (we're talking "options" here)...




The "insurance policy" aspect Epperson cites as reason for owning far out-of-the-money gold call options makes a lot of sense given today's extraordinary, systemic risk (which includes sovereign default and prospective hyperinflation caused by quanitative easing). However, in brief bouts of de-leveraging (such as would occur with a sovereign default) capital could become scarce, and so anything liquid would tend to be sold. Remember, much as needed capital in 2008 was raised selling stocks, so too was it raised selling gold (as well as commodities more generally). It's in the aftermath — in the flood of liquidity made available via Q.E. — hard assets are more likely to be bid up.

—Tom Chechatka