- Gold market signalling upside risk/reward
- Yellow metal retreats as Remain consensus grows
- A defeat for Leave likely won't send gold to the depths
By Ole Hansen
The gold market currently perceives the risk/reward as being heavily skewed to the upside. As the UK referendum has drawn closer, the price difference between out-the-money calls and puts have moved aggressively in favour of calls.
This comes on the assumption that a Leave vote would have a much bigger positive price impact than the equivalent negative one on a vote to Remain.
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Another way to measure this is to take the price difference between the cost of a 25% delta call with a one-month expiry against a similar put.
So far this June, the difference has rallied and currently stands at 2.8%, not far from the five-year high of 3.2% reached back in February. So while the market has begun to settle for a Remain vote and gold has fallen, the options market has kept up the relative cost of buying calls against puts.
In terms of turnover among individual options, the top 10 list of most-traded strikes this past week is evenly split between puts and calls.
A major buildup in net-longs by hedge funds during the first two weeks of June has increased demand for protection. That is probably one of the reasons why July 1,250 and 1,220 puts expiring on June 27 have been the two most popular this past week.
Following a near $50 selloff since last Thursday on the assumption that the Remain vote will win, the question remains how much further downside risk there is to gold. Following my piece
earlier today – where i mentioned the downside risk being limited to $1,245/oz – i have received offers from clients willing to bet that it would go lower than that.
I believe that the Brexit vote has really only played a part during the last leg of gold's rally up to $1,315/oz. In the likely outcome of a Remain vote, some short-term volatility will hit all markets with positions being adjusted.
During this process, gold may get hurt from additional long liquidation from hedge funds. But with long-term investors increasing – and not reducing – demand during corrections, we continue to view such additional setbacks as buying opportunities.
At the Royal Gates, London: The UK referendum has surely had an effect on gold prices, but a Remain vote is not likely to send prices plunging. Photo: iStock
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank