Options Market Sees Bottom In Gold With Urgency On Hold At Fed
By Joseph Ciolli
(Bloomberg) — With gold showing signs of recovery after
its longest slump in 17 years, investors are staking a claim
that the precious metal is reaching a bottom.
Short interest in the SPDR Gold Shares exchange-traded fund
is near the least since April, according to data compiled by
Bloomberg and Markit Ltd. Investors own about 680,000 options
betting on a decline in the ETF, compared to about 1.4 million
contracts wagering on a rise. That?s around the lowest ratio of
puts to calls since September, Bloomberg data show.
Gold surged 1.6 percent on Wednesday, the most since
January, as the Federal Reserve indicated interest rates will
rise at a slower pace that previously forecast. That trimmed
gold?s 10 percent retreat from its 2015 peak spurred by surging
U.S. Treasury yields — a headwind that?s near the point of
exhaustion — leaving the precious metal primed for a reversal,
according to Michael Purves of Weeden & Co.
?The bears at this point have to be a little bit scared
about gold staying depressed below these low levels,? Purves,
the Greenwich, Connecticut-based chief global strategist and
head of equity derivatives research at Weeden, said in a March 9
phone interview. ?The rise in 10-year yields and the dollar
getting very strong in the background are pretty priced into
gold by now.?
In a March 6 note to clients, Purves recommended buying a
call betting on a 1.8 percent increase in the gold ETF by April.
Gold Outlook
Before Wednesday?s rally, gold for immediate delivery had
slipped from a five-month high reached in January. The metal
fell for nine straight days ending March 12, the longest slump
since 1998.
Bullion erased its 2015 gain earlier this month after a
report showed the U.S. jobless rate was at the lowest level in
almost seven years. Improvements in the U.S. economy fueled
concern that the Fed will boost borrowing costs sooner rather
than later, which had damped the appeal of the metal.
To Paul Horsnell, head of commodities research at Standard
Chartered Plc, the lack of interest in gold will give way to
buying in Asia by the end of the year. Bullion will average more
than $1,300 an ounce in the fourth quarter due to sales on the
continent, he said.
India and China accounted for 60 percent of global jewelry
purchases last year, compared with 28 percent a decade earlier,
according to a report earlier this month from the London-based
World Gold Council.
Asian Demand
?Physical demand is supporting the market at the moment,
with good demand from Asian countries,? Bernard Sin, head of
currency and metals trading at MKS (Switzerland) SA, a Geneva-
based refiner, said in a phone interview. ?Gold has a lot of a
chance to recover.?
Still, gold has been losing popularity with hedge funds and
other large speculators. While in January, hedge funds were the
most bullish in two years, speculators have been exiting gold at
the fastest pace in more than four months. Last week, they cut
their net-long wagers for a sixth straight period, U.S.
Commodity Futures Trading Commission data show.
More than $4 billion has been wiped from the value of
exchange traded funds backed by bullion in March, set for the
biggest monthly drop since September.
The trimming of positions has come as investors have
adjusted their holdings in anticipation of imminent Fed
tightening, according to Jonathan Butler of Mitsubishi Corp.
Bets Overextended
?Investors are anticipating higher interest rates, and the
opportunity cost of holding a non-yielding investment like gold
is therefore decreasing and other assets like equities are more
appealing at the moment,? Butler, a precious metals strategist
at Mitsubishi in London, said in a March 10 phone interview.
Money managers like Adrian Day of Adrian Day Asset
Management don?t anticipate a ?meaningful? rate hike from the
Fed at ?any time in the near future.? As a result, he views
bearish views on gold as overextended.
The central bank said Wednesday that higher interest rates
in April are unlikely and it won?t tighten policy until it is
?reasonably confident? inflation will return to its target and
the labor market improves further.
Short interest in the SPDR Gold Shares ETF slid to 0.56
percent of shares outstanding on March 4, the lowest level since
April 15. The ratio of puts to calls on the fund slid to 0.47 on
March 3, the lowest since April 15.
The Chicago Board Options Exchange Gold ETF Volatility
Index, which tracks derivatives prices on the SPDR Gold ETF,
plummeted 11 percent to 18.65 on Wednesday, the biggest decline
since the start of December. That?s below the gauge?s five-year
average of 19.58.
?It?s a little bit of a surprise to me how much it?s sold
off, but a lot of people were nervous and ready to hit the sell
button,? Day, the president of Adrian Day Asset Management in
Annapolis, Maryland, which oversees about $145 million, said by
phone.