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Digital Subscriptions > The Hedge Fund Journal > Issue 122 - May 2017 > Gold Options

Gold Options

Breaking out of the doldrums

ERIK NORLAND, SENIOR ECONOMIST AND EXECUTIVE DIRECTOR, CME GROUP

In the one-and-a-half months after the US elections on November 8, gold prices plunged 12% on the assumption that the incoming president’s fiscal stimulus would boost the economy and lead to higher interest rates. However, with the Trump agenda running into numerous roadblocks since then, the yellow metal has rebounded, recouping nearly all its post-election losses. Gold options, meanwhile, have perked up from their recent lows, but with implied volatility at less than 14% they remain historically inexpensive (Fig.1).

Fig.1 Gold Prices and Implied Volatility Stuck in the Doldrums
Source: Quickstrike OG_30 ATM Implied Volatility, Gold Futures Price

Going forward, there are possibilities of big moves to the upside and downside that could reawaken the sleepy options market and lead gold options to significantly higher levels of implied volatility. Although many factors influence gold prices, we see two elements playing a dominant role:

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