(Kitco News) – World Gold Council’s Adam Perlaky who is a senior analyst in the Americas region for WGC notes some activity in the options market could indicate a price rise in on the horizon. In his latest note from June 23rd.
He said “Now that a pullback has materialised, the gold options market shows some interesting dynamics forming. Historically, from a volatility perspective, when gold sells off quickly, we usually see the ‘put skew’ increase as investors are willing to pay a premium to protect against further downside. In the selloff over the past week, however, we have seen the put skew decrease or ‘cheapen’, suggesting investors may be selling out-of-the-money (OTM) put options to gain long exposure to gold at a price they might consider more attractive. They have also been buying more at-the-money (ATM) puts, in lieu of downside puts to take advantage of the recent increase in implied volatility, as the ATM put prices will likely be more sensitive to price and volatility changes”.
In layman’s terms, this means when there is a price move lower if traders and investors want to protect their downside they would buy puts. This would then lead to a price increase in those premiums but this time out this has not happened.
He added “By the same token, while implied volatility has risen so, it has so far only done so slightly, moving up about one volatility point to a level of 16 (equivalent to a 16% annualised expected volatility). This is still in line with historical average levels. By means of comparison, during previous similarly sharp downward moves, we have often seen gold’s implied volatility reach levels closer to the 20’s.”.
Lastly, on ETF flow Perlaky said “we have seen positive gold-backed ETF inflows, even as the gold price sold off sharply last week. In particular, North American funds, whose flows often move in the same direction of price and often with larger magnitudes, have actually seen inflows this month – a further indication that investors may be taking advantage of the lower price level to gain long gold exposure.”.