Gold Options

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).

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:

1. Expectations for changes in US monetary policy.
2. Changes in gold mining output.

These two factors exert their influence in very different ways. The first is demand-based and moves gold prices on a day-to-day basis. The second is a supply-based influence that appears to move gold prices on a year-to-year basis. Both factors have the potential to create strong trends in gold prices and impact the implied volatility of gold options.