FxWirePro: Spotlight On Vols Normalizing In Precious Metal Segment And Shorting Prospects

The price of precious yellow metal for the first time ever punched through the R1m a kilogram price level. Though trading below its 2012 peak of $1,772.25 an ounce in dollar terms, the stiff resistance is observed at $1,750 areas. Gold (in the bullion market) gains considerably from the last couple of days, especially after gold testing the strong support at $1,445 - $1,455 levels).

The net gold longs surged USD3.925bn to just shy of USD50bn in the recent past equivalent to 328k contracts a record which surpasses the 2016 peak bullishness for the yellow metal.

The explosive jump in precious metals implied vols (27vols in 3M tenor for gold and 54vols for silver) from the Feb 20 low to the March high, which came near the 2008 peak, was the quickest on record. Even after paring back some of the spike, precious metals vols reversal lower is lagging and vols are still more than 2 sigma rich to the FX G10 vols (VXY-G10) – 1st diagram. Jump in the precious metals vols outstripped the change in spot during the same period as spot turned out to be quick to mean-revert (refer 2nd diagram).

Back in November we recommended long front / short back gold vol calendar on the basis of the too steep vol curve and in anticipation of continuation of 2019 gamma performance via moderate gamma events. 

The recent vol event was anything but moderate. The unpreceded spike has created a medium-term selling opportunity now that the central banks are throwing everything they’ve got at the crisis and that the government actions are starting to show signs of Great Lockdown potentially easing in near future. The more upbeat sentiment put downside pressure on the precious metals vols even as the macro challenges are likely to persist. Courtesy: JPM