The volatility of numerous assets has shifted along with the performance of gold, which has recently rebounded to nearly flat on the year. Given this shift, we consider it important to assess the current gold market conditions from a volatility and derivatives perspective, along with what technical charts are suggesting about where gold could move in the near- and long-term. We believe that regardless of an investor’s gold sentiment, the following conditions are present and create an opportunity:
- Gold has been one of the most stable assets from a volatility perspective – both, during the pandemic, and during the subsequent rebound, giving additional credence to its role as a portfolio diversifier
- The at-the-money implied volatility of gold1 has fallen considerably with its recent muted realised volatility2, yet the ‘smile’ of the options strikes remains significant, with both out-of-the-money (OTM)3 calls and puts trading at higher premiums, versus at-the-money (ATM) options, suggesting investors anticipate extremes -- either very little or very significant gold price movement4
- Put volatility, particularly OTM volatility, remains elevated, suggesting investors are still positioned for downside exposure in gold, despite the recent rally
- The term structure5 of gold options have steepened as shorter dated implied volatility has fallen
- Gold had an important technical breakout recently, and looks poised to test all-time highs, but could be overbought in the short-run.
Implied volatility refers to how much the market believes the price of gold will move over a given period.
Realised volatility is the measure of how much gold moves over a given period
Out-of-the-money (OTM) options are those that are struck at a distance away from the current price of the underlying security. For instance, a 95% or 105% strike option is an option that is 5% below or above the current strike price.
Three-month expiries are used as a general barometer to factor in the most widely traded options on average, along with options markets standards.
The term structure of gold futures is the difference in implied volatility across different tenors (or expirations) of the options.
