Overnight, Bloomberg News highlighted waning momentum for Gold (Gold Losing Appeal for Investors Retreating From Rally Bet), citing data suggesting:
Hedge funds and other speculators cut their wagers on a bullion rally for the fourth time in five weeks. As traders tire, the metal’s 30-day historical volatility has dropped to the lowest since November. Open interest is also on the decline.
Speculators less bullish stance makes sense following two consecutive monthly employment gains. And with that, coming rate hikes. Per Bloomberg:
Higher rates cut the appeal of gold, which doesn’t pay interest or offer dividends like assets such as bonds or equities. Traders are betting that there’s a 42 percent chance the Fed will raise rates by the end of the year, up from 12 percent at the start of July.
Your guess is as good as mine as to when the Fed finally raises the Fed Funds rate for only the second time since June 2006 (the first time since last December). But as far as getting one in 2016, Fef Fudn Futures still place less than a 50/50 shot at the December FOMC meeting, a little more than a month after the election:
Total options open interest in the GLD, the S&P Gold Shares etf that tracks the price of gold is very near a 52 week high:
But hedge funds and speculators still appear bullishly positioned overall, despite dialing it back a little. Total call open interest is 2.5x that of puts at 3.2 million to 1.25, with the three largest strikes of open interest 95,000 Sept 125 calls, 75,000 Sept quarterly 140 calls and 72,000 Sept quarterly 135 calls. Now, normally just looking at call open interest doesn’t give you a great sense for bullishness, but the flow for months has been the rolling of upside calls and call spreads and is probably outright, with only a portion possibly a hedge against short futures positions.
One reason for the continued call open interest is that gold remains bid despite the easing of economic worries. Those worries resulted in a 30% rally from its multi-year lows made in December and for the most part has held:
Short dated options in GLD are just off 2016 lows, with 30 day at the money implied volatility at 14%, well below the 1 year average near 17%, with the short term movement of the underlying (realized volatility) also near 2016 lows:
This lack of movement just 3% off of the 52 week highs, with options prices as cheap as they are, U.S. equities at all time highs, equity vol at 52 week lows and the 10 year Treasury yield pinned to 1.5% is interesting. Call options open interest remains high, options prices low, and the commodity remains bid. Traders may be worried about a pullback if the economic data continues to stay decent, but that pullback hasn’t happened. hasn’t really. But with cheap calls available they are staying in the game.
As we get closer to Sept regular and quarterly expiration it will be interesting to see if that call open interest gets rolled out a bit. Given the relative cheapness of GLD options, the fact that it really doesn’t go down meaningfully despite a calm economic environment could mean a long entry makes sense in the coming days/weeks. Ideally on a pullback to the prior breakout level in the low $120s, very near the uptrend that has been in place since late December. But it seems like everyone’s waiting for that pullback and it hasn’t come.
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