Janet Yellen is breathing life back into the gold market.
Trading in bullion options show the biggest rally in nine months has more to run after some contracts betting on higher prices surged by the most since 2012 yesterday. Fed Chair Yellen’s outlook for low U.S. interest rates is bringing investors back to gold after a measure of volatility sank to the lowest since 2010 earlier this week.
This year’s soaring equity markets left the metal out of favor as open interest in Comex futures slumped to a five-year low in April and holdings in global exchange-traded products backed by bullion reached the smallest since 2009 this month. Now, demand is rebounding as lower borrowing costs revive the threat of inflation and escalating violence in Iraq boosts the appeal of a haven.
“Yellen’s words worked like magic for the gold market, which has otherwise been very lackluster,” Dan Denbow, a portfolio manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio, said yesterday. “The political turmoil in Iraq and Ukraine continues to provide support, but the main reason for the rally is Yellen.”
The Rise and Fall of Gold
The most-traded bullion option on the Comex in New York yesterday was a call giving owners the right to buy futures for August delivery at $1,350, with an estimated total of 3,419 lots changing hands, according to the latest data from the bourse. That compares with an average volume of 205 in the past year. Each contract is for 100 ounces.
The contract surged more than fourfold to $8.60 yesterday from $1.80 a day earlier, the biggest gain since at least November 2012. A July $1,300 call and a July $1,325 call, the next most-traded options, also climbed by the most since 2012. The $1,350 August call was the most-traded option again today.
Futures for August delivery climbed 0.1 percent to $1,315.60 an ounce at 11:47 a.m. on the Comex today, after rising 3.3 percent yesterday, the biggest gain for a most-active contract since Sept. 19. The metal has climbed 9.4 percent this year.
Gold’s 60-day historical volatility, which this week reached the lowest since October 2010, rebounded to the highest since May yesterday, according to data compiled by Bloomberg.
Some investors lost their faith in the metal as a store of value last year amid an equity rally and muted inflation. Bullion slumped 28 percent in 2013, the biggest drop in three decades and snapping a 12-year rally.
Holdings in global ETPs tumbled about 19 percent in the past 12 months as the Fed trimmed its bond buying. The Standard & Poor’s 500 Index of shares soared to a record yesterday.
“The gold move that we saw could be just a knee-jerk reaction, since the stock market continues to move forward,” Lance Roberts, who helps oversees $600 million as chief strategist for STA Wealth in Houston, said yesterday. “Gold is still stuck in a range.”
ETP holdings fell to 1,713.1 metric tons yesterday, the lowest since October 2009. In 2013, more than $73 billion was erased from the value of the funds, according to data compiled by Bloomberg.
Bullion climbed 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs near zero percent, boosting inflation concerns. Prices touched a six-month high in March after Russia annexed the Crimean peninsula. The unrest has been followed by clashes between pro-separatists and government forces in nearby eastern regions of Ukraine.
Inflation expectations, measured by the five-year U.S. Treasury break-even rate, have climbed for four straight days through yesterday, the longest streak since April.
“There have been too many bears in the woods this year due to very strong stocks, and funds had been under-invested in gold for some time,” George Gero, a vice president and precious-metals strategist at RBC Capital Markets in New York, said in an e-mail yesterday. “With all the turmoil in the Middle East, Ukraine and Russia, clients are asking fund managers if they are returning to gold.”
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