Gold Caught Between Rates and Inflation Crushes Volatility

  • Wagers on gold-futures volatility are near a two-year trough
  • Holdings in exchange-traded funds hit lowest since May

For all the talk of faster inflation, gold traders are pricing in a relatively calm market.

Wagers on volatility in the precious metal are near a two-year low, diverging from a gauge of inflation bets by the most since September 2014. With the Federal Reserve tightening its policy and the U.S. dollar hovering around its strongest in more than a decade, investors have been shunning bullion, sending U.S. holdings to an eight-month low.

“Inflation expectations are clearly picking up,” said Brad Yates, the head of trading for Elemetal, one of the biggest U.S. gold refiners. “But the opposing force is that the Fed is fundamentally more likely to raise rates at any given meeting than they are to lower them. So it’s up to everyone’s view of those two curves as to where real rates are going over the course of this year.”

For more on U.S. monetary policy, click here.

Caught between two forces, investors are holding off placing big bets on the metal, sending the cost of gold options lower.

Here is where the market stands:

  • Six-month implied volatility on gold, which has had a tendency to move closely together with the 10-year breakeven rate, has decorrelated from it. 
  • Spot gold has rebounded 7.9 percent since a December low, though it still trades below its five-year average. On Tuesday, it climbed for a seventh straight day, its longest streak since November.
  • The cost of hedging against SPDR Gold Shares declines in the next three months is falling back toward its annual mean, after surging to a more than one-year high following the U.S. presidential election.
  • Holdings in exchange-traded funds backed by bullion have slipped 12 percent since a high in 2016, as the surge in the Bloomberg Dollar Spot Index hurt demand for assets priced in the currency.
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