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Since March 19 when the front-end gold vols peaked the normalization has flattened the vol curve and halved the March vol spike. The fundamental analysts see gold price staying on a relatively muted glide path, modestly lifted by real yields only but starved of more explosive drivers. Amid such backdrop realized vol should be contained but the risk posed by daily spot gyrations even absent a drift keeps us more interested in fwd vols as a safer place to position for further normalization.
As evident from 1st chart the quick pace of the recent gold vol curve normalization has resulted in XAUUSD fwd vol being uniquely positioned within the rich fwd vol quadrant of the fwd vols vs. vol carry metrics. 1.5pts of vol carry for 3m3m gold FVA is the best among the majors but nothing to brag about as it's just enough to cover the transaction cost. More interestingly, at only 4pts from the March peak, 3m3m fwd vols downside is more manageable and offering better risk/reward than the 3M-6M spot vols which are already 10-13pts off the recent highs.
Moreover, 2nd chart shows 3m3m FVA returns historically following smooth path during vol normalization episodes making them a low risk exposure.
We recommend: Synthetic short XAUUSD FVA expressed via delta- hedged long 3M vs short 6M straddles gamma neutral calendar @23.8ch vs 23.5/25 indicative. Courtesy: JPM
