Meet the new gold – your deflation hedge
Gold's recent momentum was broken on Wednesday when its settled slightly lower after eight straight sessions of gains although the metal stayed near five month highs.
In brisk trade of nearly 20m ounces gold for delivery in February – the most active futures contract – gave up $0.50 to end at $1,293.70 in New York. Earlier in the day the metal briefly scaled the psychologically $1,300 an ounce level – the highest since August 19.
Gold is trading up over $100 or 8.5% in 2015 as investors seek cover from turmoil on financial markets rocked by the confidence-shaking move by the Swiss central bank last week which rocked the currency markets and ventured into new monetary policy territory with interest rates pushed deeply into negative territory.
Ole Hansen, chief commodity strategist at Danish bank Saxo, says investors and traders reconnecting with the yellow metal as a safe haven shows that "while gold is normally seen as an inflation hedge" recent trading activity "is an indication that investors are now using the metal as safe haven bet as well as a hedge against deflation and negative interest rates":
"The belief in central banks as the providers of market stability suffered a serious blow last week. This, combined with the expected announcement of quantitative easing from the European Central Bank on Thursday, has shifted the focus away from the rising rising dollar and the expected normalisation of US interest rates."
Hansen says moves in the option market where "the increased market risk has led to a jump in volatility" showed this change in sentiment very clearly.
On top of that call options (contracts to buy gold at a certain price at a later stage; a bullish bet) now attract the highest premium versus puts (options to sell gold at a certain price in the future; a bearish bet) since September 2012 when gold was attempting (unsuccessfully) to retake $1,800 an ounce.
The most popular call option had a strike price of $1,300 an ounce. That particular contract expires next Tuesday.
There is much more on the options market in gold at Saxo's TradingFloor website, much of which is too esoteric for these pages.
Image by Anthony Catalano