Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold market not ready for an election shock
Ole Hansen
Head of Commodity Strategy
Summary: With less than a week to go before the U.S. presidential election on November 3 we take a closer look at the latest gold market developments. With the yellow metal having gone increasingly stale around $1900/oz we turn our attention to the options market for clues as to how investors and traders are positioning themselves ahead of Tuesday's major risk event.
What is our trading focus?
XAUUSD - Spot gold
GCZ0 - Gold future, December 2020
GDX:arcx - VanEck Gold Miners ETF
GLD:arcx - SPDR Gold Shares
IGLN:xlon - iShares Physical Gold (UCITS eligible)
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With less than a week to go before the U.S. presidential election on November 3 we take a closer look at the latest gold market developments. The election, potentially one of the biggest event risks of the year comes on top of ongoing worries about a renewed acceleration in Covid-19 cases in Europe, the current epicentre, as well as in the U.S.
Gold has settled into a relative narrow range around $1900/oz with U.S. stimulus on/off talks, bond, forex and stock market developments not given the market a significant signal in either direction. With this in mind we turned our attention to the options market for clues as to how investors and traders are positioning themselves ahead of Tuesday. To do this we ran an update on the most actively traded options in GLD:arcx and GDX:arcx, the biggest gold and gold miners ETF’s.
Looking at options with expiry after the election we found, perhaps not surprisingly but also somewhat concerning, an overwhelming focus on the upside via calls.
The massive $77 billion SPDR Gold Shares Investment fund (GLD:arcx), last traded at 179, only have one put options registered among the top ten most traded during the past week. Among the short-dated options with expiry in 23 days on November 20, the 183 and 184 calls are the most traded. The most popular strike, both in terms of volume and open interest is the 195 call expiring on January 15.
Moving onto gold miners we take a closer look at the $16.5 billion VanEck Vectors Gold Miners ETF (Ticker: GDX:arcx), last traded at 38.8. The ETF tracks the NYSE Arca Gold Miners Index and invests in materials stocks of all cap sizes across the globe. While a bit more nuanced we still find a majority of call options among the ten most traded strikes.
At the top we find emerging signs of hedging activity after the 38 Put, expiring on November 20, traded more than 9000 lots on Tuesday. The strike that has attracted a large following, as seen through the open interest, is the 40 Call expiring on January 15.
While large speculators in gold futures such as hedge funds and CTA's have more than halved their exposure since the latest peak in February, total holdings in exchange-traded funds backed by bullion have seen a continued climb to the current near record level around 111 million ounces.
Investors have been attracted to gold for a number of reasons during the past year and that support is expected to continue no matter who wins the keys to The White House next week. Global interest rates are at rock bottom levels and are likely to stay there for prolonged period of time. Considering the pandemics growing negative economic impact on the global economy we can expect continued monetary and fiscal support that eventually may lead to rising inflation and a weaker dollar. Developments that eventually could drive gold higher toward $2000/oz and eventually beyond.
Judging from the options market, however, the gold market is close to ignoring the risk of an election outcome that in the short-term at least could rock the current bullish sentiment. The weakness seen across stock markets and renewed dollar strength are both warning signs of rising risk aversity. If that extends beyond Tuesday, perhaps on the combination of a Biden win and a Republican controlled Senate, gold could be exposed to a “dash for cash” sell-off, potentially to $1835/oz or perhaps even as low as $1762/oz. A level that represents a 50% retracement of the March to August rally.
While maintaining a bullish outlook we also worry that next week’s election in a worst case scenario could trigger a deeper correction. While not on the 15% scale seen in 2016 following Trump’s shock win, investors may consider the use of options to hedge against short term adversity.
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