05 August 2009

Gold Volatility Popping

Gold volatilities, along with vols in just about everything have been in a steady tankage since the near Apocalypse in the latter part of 2008.

The following image is of 63 day, 20 day and 6 day historical volatilitities on GLD the gold ETF; the varying lookback periods serve as a look at the structural volatility of gold. The general level of HVs have come from ~50-60% down to sub 20%, effectively reducing by two thirds. It does look like HVs are bottoming out however.

This level of HV is not unusual, having visited these levels twice before since the inception of this ETF in late 2004, the observation at those points was that vols stayed pretty low for months before eventually popping.

So does this mean gold stays quiet for a few months? Maybe not. Two things to note going forward.

1/ The seasonal tendency of gold shows that September is traditionally when gold starts flying, because of jewellery demand at this time of year,apparantly. This chart from www.spectrumcommodities.com

Important thing about seasonals; it's a historical *tendency*. It doesn't mean gold WILL run higher during September.

2/ Implied volatilities are popping, with IV a full ~50% higher than the 30 day HV plotted on the following graph.

So are option traders anticipating an increase in realized volatility? Well, IVs have consistently overestimated realized volatility; there's good reason for this with the ever present chance of Gold bugs going ape shit over one or another threat to world stability.

But an IV pop is what it is, it doesn't necessarily protend anything, as we can see from recent history, but reason to sit up and take notice. Perhaps the pop in the underlying a couple of days ago is responsible, perhaps gold bugs are about to party... again.

I think it's interesting juncture. I don't have a position in gold at the moment, but this looks an interesting time to watch more closely.

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