Gold Outlook: Bears Showing Signs Of Fatigue

Bloomberg reports today an extremely interesting insight from the options market. Based on data compiled for SPDR Gold Shares (GLD) by Bloomberg, the put-to-call ratio, or the number of bearish options trading compared with bullish ones, is at the lowest since 2012. “The open interest on puts fell to the lowest since mid-July on Sept. 21, signaling bears may be losing their stranglehold on the market.”

These data show that gold bears are finally showing signs of fatigue, if options trading is any indication.

gold_bears_options_Sept_2015

Chart courtesy: Bloomberg

This drop comes two months after bullion dropped to a five-year low. Meantime, the narrative surrounding gold remains that an interest rate hike will put additional pressure on bullion prices. Although we do not exclude such an outcome, we firmly believe that the real interest rate is the key determining factor, i.e. interest rates combined with inflation rates.

As suggested by Richcomm Global Services, today’s “sell-off” in gold is most likely on the clarity from the Fed on a rate hike in December. “It’s clear from (Yellen’s) talk that the Fed paused in September only for the global markets’ sake. Commodities, especially bullion, should extend their sell- off.”

Meantime, UBS bank came out earlier this week with a constructive outlook on gold. In a note to their clients, the bank explained three factors which point to an over-reaction in the gold market.

“First, based on internal models of UBS, it would appear that US equilibrium real rates may settle lower versus previous cycles and versus current market expectations. Second, the bank thinks that the bulk of the adjustment to the current and expected macro environment has already taken place. Third, supply and demand fundamentals suggest that the gold market is nearing equilibrium.”

Could it be that the options market has figured that the market reaction on an interest rate hike has been fully priced in meantime?

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