FxWirePro: Yellow Metal Surges Amid Covid-19 - A Quick Run Through On OTC Updates And Hedging Strategies Of Bullion Markets

The price of precious yellow metal (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). But to begin this week, these price gains have been pared with profit booking sentiments.

There were traces that investors remain highly cautious amid the prevailing pandemic circumstance. Gold posted its largest one-week percentage gain since September 2008. The yield on the benchmark 10-year U.S. Treasury fell for a second consecutive week, dropping 0.188 percentage points to 0.744%.

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.

OTC Updates: 

The 3m positive skewness of gold options contracts implies more demand for calls (refer 1st chart). These skewed IVs of 3m XAUUSD contracts are still indicating the upside risks, bids for OTM call strikes up to $1,725 is quite evident that reminds us hedgers’ inclination for the upside risks. 

One could also see the fresh negative bids for the existing bullish risk reversal setup. To substantiate the above-mentioned bullish sentiment, risk reversal (RRs) numbers also indicate the overall bullish environment (2nd nutshell). Well, we know that options are predominantly meant for hedging a probable risk event in future.

Hedging Strategies:

Capitalizing on all the above fundamental drivers and OTC indications, we advocate longs in gold via ITM call options as they look to be the best suitable at this juncture.

Thus, we still advocate buying 3m XAUUSD (1%) ITM -0.69 delta calls on hedging grounds. If 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 CME gold contracts of March’2020 delivery. We upheld the same strategy by rolling over the contracts for April’2020 deliveries as we could foresee more upside risks and intensified buying interests on safe-haven sentiments amid geopolitical turmoil and the global financial crisis. Courtesy: Sentry and Saxobank