Last week in Namibia, I sat around a campfire high in the Khomas Highlands with executives from the construction and safari industries. The end-of-day talk turned to the sorry state of the world, and why shouldn’t it?
Europe is struggling with political and economic weakness. The U.S. is so politically divided that Democrats and Republicans essentially live in different counties. Africa, as the Namibians observed, has its own perennial struggles, while Asia, especially China, seems to be getting ever more powerful. Meanwhile, national currencies are wobbly and may weaken further if central banks lower interest rates to stimulate moribund economies.
Among the businessmen at the safari camp, the consensus antidote to all these problems was buying land that has private water sources like deep-water wells, installing solar panels, and making sure the land was suitable for livestock.
And everyone agreed it made sense to own gold for a time when the dark omens become reality.
This apocalyptic “Mad Max” view of the world is reminiscent of days before the financial crisis of 2008-09. Then, it was common on Wall Street for senior executives to max out home-equity lines and to hoard cash. As one top trader said at the time, it’s surprising how little space $300,000 occupies in a safe.
We can argue about the resurgent feelings of dread and whether bad things are about to happen to good investors. But one thing is unarguable: The market expects the Federal Reserve to cut U.S. interest rates. Hence, gold —the feel-good asset in times of economic duress—is suddenly as popular as Make America Great Again hats at a President Donald Trump rally.
Look no further than the SPDR Gold exchange-traded fund (ticker: GLD). It is near a 52-week high, which is a bit odd as stock prices are also around record levels. Enthusiasm for stocks is typically not matched by rallies in doomsday assets like gold.
But the specter of lower interest rates, and the inversion of the yield curve, has many investors worried about recessions or worse. Since mid-June, when the Federal Reserve’s rate-setting committee last met, GLD has advanced about 6%. The rally reflects all of the feelings, and then some, that were expressed around the safari campfire.
With the SPDR Gold ETF at $133.60, investors can sell the October $130 put for about $2.16 and buy the October $135 call for $4.10. The risk reversal—selling a put and buying a call with the same expiration but a higher strike—costs $1.94. The trade proves profitable if the ETF trades above $136.94. Should it fall below $130, investors are obligated to buy the ETF, but market dynamics should mitigate that outcome because of rising investor fears about the perilous state of the economy.
The October expiration was chosen in anticipation that investors become increasingly interested in pursuing flights to safety. September is traditionally the most volatile month of the trading year as investors worry about October, which has marked many of the market’s worst declines.
If these concerns hold steady—and it is hard to see any significant change, especially if the Federal Reserve lowers interest rates at the July meeting—the gold trade should shine.
