While geopolitical event continue to create market anxiety, gold price is unlikely to surge higher according to the option market. In fact, gold option volatility, reflected by the CBOE’s gold implied volatility index GVZ, is nearing a 7-years low, which was last hit, in mid of March. Current level reflect market complacency. While it appears that gold’s prices are sliding sideways waiting for next impetus to drive them higher or lower, the decline in implied volatility ahead of the French and British election in May and June respectively reflect that gold options trader believe the status quo is the likely outcomes.
Just as a refresher, implied volatility is market estimate of how far a security will move over the courses of a year on an annualized basis. Implied volatility is the key component used by Forex traders to determine the value of an option, based on the likelihood that gold price will be at a specific level at some point in the future. An implied volatility level of 17.5%, means that option traders believe that prices will not move more than 17.5% from the current levels, either higher or lower, during the next year.The low level of implied volatility tell us that any astonish could lead to a surge in gold costs, but the status quo will keep cost perfect. The decline in option premiums has been driven by declining gold implied volatility, which has set the gold market up for a possible short squeeze if the market is astonished.
Astonish that could shock the market is a victory for French Presidential Candidate Marine Le Pen. Traders would likely crawl to purchase safe-haven assets if Le Pen was victorious, and gold implied volatility would surge as option traders crawl to cover themselves.
Another political event is the snap general elections that was called for by British Prime Minister Teressa May. If she loses the election, which appears to be a referendum on quickly starting the Brexit process, the pounds could wing, and this unexpected event could also drive up gold costs.
North Korea continues to jeer the West, and no one should be astonish if Donald Trump has an itchy trigger finger. While the consensus is that Trump will use China to help confine North Korea, his bravado is huge, and he is likely to show some form of aggression to let the American people that he is President that nobody can heap will.
Trump has already flip flopped on NAFTA, which has cause choppy market condition for the Canadian dollars and the Mexican Peso. Just this week, Trump’s management told reporter that the President was considering withdrawing from NAFTA which was a campaign promises. Later in the week, Trump told the American people that he had two very good conversations with both the Presidents of Mexico and the Prime Minister of Canada and distinct not to pull out of NAFTA.