The Increasing Absurdity of Gold Vol as Dictated by the GLD flow
Welcome to the new Gold. Where robot marketmakers back to back GLD to Comex. Term structure be damned.
At least in the old gold, dealers crushed options guys and the retail was the traders’ savior. But , alas that retail is now in GLD. Thank you Comex for protecting your franchise. Well done.
Like in the VIX for equities, Gold Vol now occasionally acts prior to events in unsound ways. Short dated buyers of protection distort the term structure putting the spot month over the second. This is macro option opportunity in a micro traded world.
This is “wrong” because the products (ViX and GLD ) have term structures that are financial. The cost of carry is not related to supply fungibility.
So unless aliens have landed demanding October Gold or December Gold causes cancer this will normalize after a move. How far the move does not matter. This is flow related distorting Break even curves. Like the GSCI getting front run every month.
That said it exists and persists. Lean into it if you dare in a market that runs away from size instead of gravitating towards significant order flow. Exit strategy?: Ask Ben for more ZIRP cost of carry money, mismark your books OTC and “pray that it comes back”
Swap Dealers: Necessary Evil for liquid Markets
We are in a deflationary market for liquidity. Which brings us to the swap dealer issue created by Dodd-Frank. Banks do not want to have to register as swap dealers and are doing everything they can to avoid it. if they lose, it will be a triumph for transparency, but a failure for liquidity. At least Rockefeller got the oil to where it was meant to go.
More on the Swap Dealer / CME battle Later.