FxWirePro: Turbulence in Bullion Market Ahead of G20 Summit – XAU/USD OTC Indications and Hedging Perspectives

Gold broke above $1,400/mt on a perfect mix of ingredients – low bond yields, a soft dollar, geopolitical and trade tensions, and slowing global growth. Despite the slight sell-off in equities, safe havens sold-off as well, with gold, the yen and safe government bonds weaker. US 10-year yields rose to its highest level in a week, while the NOK strengthened as oil prices continued to inch higher.

The gold is likely to drive up to the next strong supply zone of $1,500/mt. The buying sentiment intensifying bullion market stronger, having broken the 6-year resistance level of $1,400/oz and having largely consolidated between $1,200 to $1,400 for the better part of three years. 

Entire focus would now be on the G-20 summit that is scheduled for this weekend but assuming the base case of amicable Xi-Trump relations and a broad agreement to resume US-China trade talks, we do not believe that development is strong enough to sink the precious metal below $1,400/oz.

OTC Updates for Bullion Market: Please be noted that the positively skewed IVs of 3m XAUUSD contracts are still indicating the upside risks, bids for OTM call strikes up to 1500 signifies hedging sentiments for the higher price risks. One could also see a bullish risk reversal setup. To substantiate the above bullish sentiment, risk reversal (RRs) numbers indicate an overall bullish environment. 

The above risk reversal numbers have been known as a gauge of gold’s underlying market for bullish opportunities. Well, we know that options are predominantly meant for hedging a probable risk event in the future.

Options Strategy: Capitalizing on the minor shift in risk reversal numbers of gold in the short-run and bullish neutral risk reversals of longer tenors, we advocate longs in gold via ITM call options.

Buy 3m XAUUSD ATM -0.70 delta calls on hedging grounds. If the 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 in CME gold contracts. We now like to uphold the same strategy by rolling over the contracts for July’19 delivery as we could foresee more upside risks. Courtesy: Sentrix & OCBC

Currency Strength Index: FxWirePro's hourly USD spot index was at -17 (mildly bearish) while articulating (at 08:39 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex