FxWirePro: Intensified Bullion Hedging, Underlying Gold Price Extends 6-1/2 Year Highs As U.S. Airstrike Bolsters Safe-Haven Sentiments

The precious yellow metal has surged to a fresh 4-month highs on the back of the U.S. airstrike killed one of Iran’s commando in chief, Qassem Soleimani, who happened to be a senior Iranian influential military official, the news bolstered the apprehensions in the Middle East.

Qassem headed militias that fortified Iran’s power, is shot dead in a drone attack in Baghdad authorized by Trump, the Defence Department reported late Thursday. 

As a result, almost entire commodity markets have surged in green including crude. WTI and Brent rose by 4% each within a spur of the moment. While the price surge in the precious metal segment has also been exuberant, Gold (XAUUSD) spiked higher more than 1.30% to $1,550.38 an ounce and has been extending six and a half years highs. While the silver prices have also rallied about 1.3%, the Platinum and Palladium are no exception, they also have advanced.

The bullion market has been establishing a robust consolidation phase by rallying almost 22.40% throughout 2019 amid the dollar weakens and lingering geopolitical apprehensions. Such bullish rout has been the largest annual price jump since 2010.

OTC bullion markets have also been full of zip in hedging activities foreseeing the bullish risks.

OTC updates: 

The 3m positive skewness of options contracts of gold implies more demand for calls (refer 1st chart). These skewed IVs of 3m XAUUSD contracts are still indicating the upside risks, hedgers’ bid for OTM call strikes up to $1,640 is quite evident. One could also see the fresh bids for the existing bullish risk reversal setup. To substantiate the above-mentioned dubious bullish sentiment, risk reversal (RRs) numbers also indicate the overall bullish environment (2nd nutshell). Well, we know that options are predominantly meant for hedging a probable risk event in future.

Hedging Strategy:

Capitalizing on all the above fundamental drivers and OTC indications, we advocate longs in gold via ITM call options as they look to be the best suitable at this juncture.

Thus, we still advocate buying 3m XAUUSD (1%) ITM -0.69 delta calls on hedging grounds. If expiry is not near, delta movement wouldn’t be 1-point increase with 1 pip in the underlying movement, which means if the spot moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money call option with a very strong delta will move in tandem with the underlying. 

Alternatively, on hedging grounds, we advocated long positions CME gold contracts of 2019 deliveries. We now wish to maintain the same strategy by rolling over the contracts for March’2020 delivery as we could foresee more upside risks and intensified buying interests on safe-haven sentiments amid geopolitical turmoil and the global financial crisis. Courtesy: Sentrix and Saxobank