Year-End Precious Metal Insurance Sale (GLD, SLV)

Holiday bargains abound now. Relatively speaking, of course. Take the price of gold and silver as examples. Price-conscious bullion buyers who waited a week for a sale (“Five Golden Rings A Bargain?“) were recently able to save $20/ounce for the shiny yellow stuff.

Now, if you already owned metal at a higher-than-current cost basis, this sale isn’t such a big deal. In fact, if you’ve watched the price charts, you might be feeling a little queasy right now. Year-end trading tends to be notoriously volatile. It’s especially so this year as big funds close out their winning trades ahead of the Dec. 31 mark-to-market tax accounting. Gold and silver, of course, have been some of this year’s big winners.

The most recent CFTC figures show that net speculative length in COMEX gold futures fell 2.6 percent last week as four more money managers bailed from their long positions. Three funds bailed from their long silver positions and, perhaps more telling, five jumped ship to short the metal.

There’s been a slowdown, too, in the money flows into the big gold and silver trusts. The Money Flow Index for the iShares Silver Trust (NYSE:SLV), for example, slumped toward 50 after peaking above 80 earlier this month.

Silver Trust (NYSE:SLV) Money Flow Index

Silver Trust (SLV) Money Flow Index

Trading ranges, too, have tightened up considerably over the past week—a typical prequel to bust-out moves. See the wedge on the (NYSE:SLV) price graph above?

Oddly, though, the options market’s not pricing in a spike in future volatility. The cost of puts on the biggest gold (NYSE:GLD) and silver trusts, in fact, has fallen over the past week.

Gold (NYSE:GLD) And Silver (NYSE:SLV) Put Costs

Gold (GLD) And Silver (SLV) Put Costs

Some of that, of course, is directly tied to the big funds’ exit. A lot of options were used to fine-tune the risk exposure of their futures and trust holdings. Beaucoup option demand has now been sidelined.

That makes for bargains for savvy investors, though. Option premiums are cheap now, so protective hedges/long volatility positions—outright long calls or puts and long straddles/strangles, especially—can be fashioned economically (for pointers, see “How To Straddle The Gold Market“).

Some investors may want to consider adding options to their holiday shopping lists.

Written by Brad Zigler From Hard Assets Investor (HAI) is a research-oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site will focus on hard assets investing without endorsing or recommending any particular investment product.

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