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Wednesday, July 18th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Options Offer Clues to Gold’s Direction

By Brad Zigler

Gold’s weak response to the Egyptian crisis has puzzled many investors. You’d think the market would reflect growing fear, sending gold prices higher. But despite Wednesday’s escalation in violence, bullion prices slumped $8 an ounce. The price decline bespeaks an overreaction on Friday, when gold jumped $14/oz.

Such is volatility. But gold market volatility has actually diminished recently. Or, rather, expected volatility – as measured by the options market – has shrunk.

The CBOE Gold Volatility Index is derived from the implied volatility in SPDR Gold Shares Trust (GLD) option premiums. And if you’ve tracked it over the past couple of months, you probably have noticed that readings have moved into an ever-tightening range:

CBOE Gold Volatility Index Vs. London A.M. Fix

CBOE Gold Volatility Index Vs. London A.M. Fix

Investors with experience in chart reading may recognize the pattern that’s developed – the “wedge” is predictive of a breakout move. But the question now is whether that breakout will occur against a background of higher or lower gold prices.

Gold’s recent track record and a little probability theory can help sort out the odds.

First, we need to get our volatility bearings. GLD’s history reiterates a pattern of falling prices accompanied by low variance:

Recent GLD Volatility

Period

High

Price

Low

Price

Period

Gain/Loss

Actual

Volatility

Last 30 days

138.00

127.93

-5.5%

16.3%

Last 60 days

139.11

127.93

-5.5%

15.9%

Last 90 days

139.11

127.93

-0.9%

17.5%

GLD’s current volatility readings are historically low. In fact, they are in the tenth percentile of the trust’s 600-day range. In comparison, the average CBOE Gold Volatility Index reading since its 2008 inception date is 27.1%.

With this data in hand, we can forecast the probabilities of breakout moves over one-, two- and three-month horizons.

The Next 30 Days

Currently, GLD trades at the $129-$131 level, closer to the trust’s 30-day low than its high. Odds are better than even that GLD will finish the next 30 days at a price within its near-term range. The possibility of a downside excursion sometime within the next month, however, is better than 2-in-3.

The Next 60 Days

The downside bias increases if we stretch out the investment horizon another month. Still, the ending price is more likely to be somewhere between the past 60 days’ high and low.

The Next 90 Days

In the next three months, the likelihood of GLD’s price breaking below the $128 level becomes more compelling. A lower ending price is, in fact, the most likely outcome, though not by an exceedingly large margin.

A Caveat

Probabilities are, of course, just that. There’s no certainty that these price scenarios will actually unfold. Even so, there’s more than just guesswork involved here.

The market’s pulse is reflected in these prognostications, but investors should keep in mind that unforeseen circumstances can radically alter the odds of exceeding the benchmark prices.

One thing’s certain. The low volatility assumption bids into option prices and makes the contracts relatively cheap. Traders with market opinions will find option purchases – calls, if bullish, and puts, if bearish – favorable now.

The original article is published at http://www.c2ads.net/full-text-rss/makefulltextfeed.php?url=http://seekingalpha.com/sector/gold-precious.xml&format=rss&submit=Create+Feed


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