Strong activity in gold options spread trades likely reflects shifting expectations for interest rates and election risks in the second half of 2024, according to the World Gold Council (WGC).
In its latest monthly report, the World Gold Council noted that a typically “benign” and “often overlooked” segment of the gold market is experiencing renewed interest, suggesting that investors are either hedging or speculating on both a rate-cutting cycle and the outcome of the US election.
The council found that options spreading positions (OSP) within the Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report have been steadily rising, nearing levels not seen since 2019–20, and before that, 2013 and 2011.
“Looking back at those periods, it seems the triggers for a rise in OSP activity were linked to one of two scenarios: either an interest rate policy shift or a market risk event,” the WGC said.
The summer of 2011 was notable for the debt ceiling crisis, it pointed out, which at the time had attracted bets that there would be a first-ever default by the US government.
Fast forward eight years to 2019, a spike in options spreading positions spiked as investors speculated on the start of a Fed cutting cycle, which materialised in July of that year.
Shortly after that, the appearance of COVID-19 gave rise to another spike alongside a rise in implied volatility.
“A further and more recent spike, in December 2023, came amidst a dovish ‘language’ pivot by the Fed but did not result in rate cuts,” the WGC said.
“We infer from these historical episodes that market event risks and policy rate shifts are likely drivers of a rise in OSPs. Today, we face both.
“Markets expect the Fed to embark on a surprisingly aggressive rate-cutting path in September and we have a systemically critical US election in early November.”
Amid this near-term uncertainty, investor behaviour reflects a strong conviction in gold as a hedge against immediate event risks, the WGC explained, while also positioning it to benefit from lower interest rates.
Looking back at August, the WGC reported that the commodity posted another healthy gain to finish 3.6 per cent higher at US$2,513/ounce. Notably, it also hit a new record high of US$2,531.60 on 20 August, though it has since dipped slightly.
Gold ETFs continue hot streak
Renewed positive sentiment around gold from Western investors assisted global physically backed gold ETFs to extend their inflow streak to four months, adding US$2.1 billion in August.
These “non-stop” inflows between May and August have supported global gold ETFs’ year-to-date losses to narrow to US$1 billion.
“All regions reported positive flows [and] Western funds once again contributed the lion’s share,” the WGC said.
Asian funds extended their inflow streak to 18 months, though the US$32 million addition is the smallest since May 2023, and North America saw its second consecutive month of flows, adding US$1.4 billion.
European funds attracted US$362 million, their fourth consecutive monthly inflow. According to the WGC, market volatility and the unwinding of the popular “yen carry trade” likely boosted safe-haven demand as gold ETFs concurrently saw increased inflows in the region.
Australia has also notched its third consecutive months of inflows at US$66.3 million in flows in August. Holdings grew 2.16 per cent to 41.4 tonnes.
Total gold global assets under management, benefiting from inflows and gold price rises, lifted 4.5 per cent to another month-end peak of US$257 billion.
