FxWirePro: A Glimpse At Precious Metals And Derivatives Outlook Of Pandemic Quarter

After breaking down in March, the relationship between real yields and gold (and gold-driven precious metals) has re-established.

With the return to ZIRP in the US, we see US 10-year real yields dipping to -65bp by the end of 2Q before moving higher to around -40bp by the end of the year.

Translating this to our gold forecast we look for gold prices to peak out around mid-year at between $1,800/oz and $1,850/oz on a spot basis.

This results in a 3Q’20 peak quarterly average forecast of $1,780/oz for gold and $17.45/oz for silver before signs of an emerging economic recovery begin to pressure prices lower.

We have boosted our palladium forecasts to $2,337/oz for FY 2020 as supply outages and rebounding demand in 2H’20 will likely keep the market tighter for longer.

At the same time, we have cut our platinum forecasts as we no longer expect the metal to fully take its pricing cues from gold and silver.

The explosive jump in precious metals implied vols from the Feb 20 low to the March high came near the 2008 peak and was the quickest on record.

We develop a trade timing methodology for precious metals Gamma vol trading that incorporates a broad set of risk-off market factors. The tactical model has seen a sharp U-turn to gamma neutral after reaching significantly long-Gamma positioning (+51%) a couple of weeks back, coming near the record high of +57% from late 2008.

The unpreceded vol spike has potentially created a medium-term selling opportunity.

Amid the U-turn in trading signals and the signs of easing in the Great Lockdown we cautiously consider expressing the marginally better backdrop via: 

1) softer fwd vols (3M/6M gamma neutral delta-hedged gold calendars), 

2) back tenor delta-hedged straddles vs strangles that harvest excessive risk premium in the wings, and 

3) Gold-AUD vega RVs. Courtesy: JPM