Gold ETF Volatility Soars as Dollar, Oil Tame Inflation: Options

The surging dollar and plummeting oil prices are posing a threat to gold’s recent rebound from a four-year low.

Options that protect against declines in a popular fund tracking gold have risen in price to the highest level in 15 months compared with a similar gauge for U.S. equities, according to data compiled by Bloomberg. The Chicago Board Options Exchange Gold ETF Volatility Index, which tracks derivatives prices on the SPDR Gold Shares exchange-traded fund, climbed 19 percent last week to 25.17, the highest in more than a year.

Decisions by central banks in Europe and Asia to loosen monetary policy spurred a rally of as much as 5.4 percent last month in bullion prices. At the same time, slowing economies overseas have aided the dollar’s rally to a five-year high, which along with the slide in crude, has muted domestic inflation. Investors typically turn to gold as a hedge against rising inflation.

“Gold is in a very challenged state of affairs,” Erik Wytenus, a Palm Beach, Florida-based global investment specialist at JPMorgan Private Bank, said by phone. The division oversees $1.1 trillion in client assets. “Inflation has remained subdued, which has taken the wind out of gold prices. Inflation in the U.S. and globally is OK, but the world could actually use a little bit more.”

Inflation Hedge

Gold touched a three-week high on Nov. 21 amid moves by central banks to spur economic growth. China lowered its key interest rate for the first time since July 2012. The European Central Bank and Bank of Japan have also added stimulus in the last two months.

Amid the recent rebound in gold, investors have been purchasing protection on the SPDR fund, sending the gold-ETF VIX to a 13-month high. The price of the metal is still down 16 percent from the year’s peak in March.

Concerns remain that inflation globally is stagnating. In the U.S., Federal Reserve minutes last month showed some members said the central bank should remain attentive to the possibility prices in the economy aren’t rising fast enough.

“When there’s a significant amount of monetary easing, there’s a rise in inflation, but with Japan and Europe, that just hasn’t happened,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said by phone. “Monetary easing just hasn’t built the fire under gold.”

Dollar, Oil

Slumping oil prices and strength in the dollar have added to concerns over deflation. Slower economic growth overseas has boosted the Bloomberg Dollar Spot Index, sending it to a five-year high on Nov. 28. Crude has dropped 38 percent from a high reached in June amid the fastest pace of U.S. production in three decades and signs of weakening global demand.

Last week, the 12-nation Organization of Petroleum Exporting Countries kept its output target unchanged even after the steepest slump in oil prices since the global recession, triggering the worst selloff since 2011 for both Brent and West Texas Intermediate crude. Gold futures tumbled 1.8 percent on Nov. 28, the most in three weeks as plunging oil curbed demand for the metal.

Gold futures are heading for a second straight annual loss, the longest slump since 1998. Societe Generale SA trimmed its price forecast for bullion last week, based on anticipation for higher interest rates next year in the U.S. Swiss voters rejected a referendum yesterday requiring their central bank to hold a portion of its assets in gold.

Gold Volatility

Shares in the SPDR gold fund have fluctuated 1.09 percent a day on a closing basis over the last 20 days, the biggest swings in that period since October 2013. At the same time, swings in U.S. equities have calmed, sending 20-day realized volatility in the S&P 500 to the lowest on record in data starting in 1984.

The CBOE Volatility Index, as the Standard & Poor’s 500 Index gauge of options prices is known, increased 3.3 percent to 13.33 last week. The gold ETF VIX closed at 1.9 times its U.S. stocks counterpart last week, the highest proportion since August 2013.

‘Printing Money’

The S&P 500 VIX jumped 7.2 percent to 14.29 at 4 p.m. in New York.

The surge in the dollar may slow as investors realize it may have rallied too quickly, according to Adrian Day, the president of Adrian Day Asset Management in Annapolis, Maryland. Any weakening in the dollar should provide support for bullion as central banks maintain stimulus and the Fed keeps interest rates low, he said by phone.

“Monetary policy remains easy around the world,” Day said. “All of this is very strong for gold. It’s really just the dollar holding it back and the sentiment around gold, which is so weak right now.”

Options betting on a 10 percent drop in the gold ETF’s shares cost 3.34 points more than contracts wagering on a 10 percent gain, according to three-month data compiled by Bloomberg. The relationship known as skew sits 40 percent above its 12-month average of 2.38.

“Gold has weakened a lot in dollar terms and is flat in euro terms,” Pravit Chintawongvanich, a New York-based derivatives strategist at Macro Risk Advisors, said by phone. “It’s not necessarily what you’d expect with two other central banks printing money. All of this has contributed to the volatility in gold over the past few months.”

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