FxWirePro: Bullion Markets Updates, OTC Outlook and Hedging Strategy

Gold’s gaining its traction a safe-haven sentiment, with inflows into ETFs (exchange-traded funds) hitting 1,000 tons since holdings bottomed in early 2016 after a prolonged unwind in the wake of the global financial crisis (refer 1st chart). While CFTC’s speculative positions in gold have also risen considerably (refer 2nd chart), please be noted that the rising curve indicates the net longs in CFTC gold’s futures. 

Well, yesterday, the total ETF holdings surged to 2,424.9 tons, the highest since 2013. Price of the precious yellow metal has constantly been gaining this year (gained about 15.72% since this May) as apprehensive investors are worried for the prevailing global slowdown and need safeguarding from the same, the relentless trade turmoil, geopolitical issues like Brexit, NAFTA etc and struggle in the bond market are indicating the U.S. is most likely headed for another recessionary phase.

Technically, a cause of concern for Gold’s (XAUUSD) rallies in the short run, was reported in our recent write-ups. Bearish patterns, such as, shooting star and hanging man are traced out at the stiff resistance levels of $1,528 that hamper the prospective 6-1/2 years highs. Consequently, the current price slid below DMAs.

OTC Updates for Bullion Market:

Please be noted that the positively skewed IVs of 3m XAUUSD contracts are still indicating the upside risks. One could see the bullish risk reversal setup. To substantiate the above bullish sentiment, risk reversal (RRs) numbers indicate the overall bullish environment. 

The above risk reversal numbers have been known as a gauge of gold’s underlying market for bullish opportunities. Well, we know that options are predominantly meant for hedging a probable risk event in the future.

Options Strategy: Capitalizing on the prevailing dips of gold price in the short-run and OTC indications, bullish neutral risk reversals of gold, we advocate longs in gold via ITM call options.

Buy 3m XAUUSD (1%) ITM -0.69 delta calls on hedging grounds. If the expiry is not near, delta movement wouldn’t be 1 point increase with 1 pip in the underlying movement, which means if the spot moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money call option with a very strong delta will move in tandem with the underlying. 

Alternatively, on hedging grounds, we advocated long positions in August month’s CME gold contracts. We now like to uphold the same strategy by rolling over the contracts for September’19 delivery as we could foresee more upside risks. Courtesy: Sentrix, JPM & Saxobank