We remain bearish on a trend basis. We forecast the gold spot price to average $1,150/oz during Q4 2016 and $1,050/oz during 2017. The strong gold rally during the first four months of this year was driven largely by speculative buying and ETF investment.
However, its level looks increasingly unsustainable; not least as key physical markets in India and China have seen demand plummet and scrap supply surge.
As a result, we believe it will prove increasingly hard for western investors to sustain the rally, and when ETF flows dry up and the Fed raises interest rates, this could prove the turning point for gold.
In India, domestic gold prices have been trading at a discount for the longest period since 1980. Import volumes in the first four months to India were less than half for the same period last year.
And in the case of China, following a sharp rise in imports for March from 43 tonnes in February, April is likely to have been a slow month, based on preliminary estimates.
Hedging Framework:
On the Comex division of the NYME, gold futures for August delivery added 0.17% to $1,214.65.
Investors were eyeing the release of U.S. nonfarm payrolls data later Friday for further indications on the strength of the job market after upbeat U.S. employment data was published on Thursday.
3-Way Options straddle versus OTM Call
Spread ratio: (Long 1: Long 1: Short 1)
Rationale: 1w ATM premiums of XAUUSD calls are trading 43.41% more than NPV, whereas implied volatility of these 1w ATM contracts are at just above 14.9%, hence there exists a considerable disparity between premiums and vols that keeps us eye on shorting such expensive calls with shorter expiries. As a result, we capitalize on such beneficial instruments and deploy in our strategy.
How to execute:
Go long in XAU/USD 2M At the money delta put, Go long 4M at the money delta call and simultaneously, Short 1M (1.5%) out of the money call with positive theta.


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