The 2023 landscape for the gold industry has been anything but predictable. We’ve seen record highs followed by significant volatility as the precious metal responds to extreme economic pressures. As we push through the second half of the year, the likelihood of further interest rate hikes and banking sector fears only add to the gold market volatility spikes, offering increasing popularity in short-term investment options that offer ideal risk-aversion to the sudden market shifts.
Gold prices have maintained within a steady bracket since the start of 2023, despite the enormous inflation rates. As expected, gold rises with inflation, though this year has been a bit different. With endless geopolitical concerns and macroeconomic uncertainties also impacting demand rates, the price of gold is too multi-faceted to simply rise and fall with the level of inflation.
As volatility across all market sectors rises, so does the need for more flexible, short-term investment assets, such as gold options trading. Gold options allow investors to purchase contracts in either gold futures or physical gold as the underlying asset, giving the trader the right to buy the asset at a pre-determined price with pre-set options to sell when the contract expires. With gold options, traders can reduce risks by relying on the agreed-upon purchase and sale terms.
At the end of May, gold futures reached $2,000 per ounce for the first time following Russia’s invasion of Ukraine and the events that ensued after the fact. The precious metal’s prices continued to dip slightly following this rise. Because of this, demand rates for entering the gold market have spiked both the volume and volatility in gold options trading.
After the Federal Reserve’s June meeting, market expectations showed an increased likelihood of another rate hike coming in July based on comments and attitudes displayed during the gathering. With the probability of another interest rate hike, banking sector fears have yet to dissolve entirely, given what happened to SVB Financial earlier this year. Investors are still seeking safe assets to protect their purchase power amid an uncertain future.
Based on the CME Group CVOL measurement, it’s clear to see how gold options convexity continues hitting the upper-end of its range each time a significant event occurs, like regulators taking over SVB Financial, Credit Suissie borrowing over $53 billion from the Swiss National Bank to prevent a collapse, SVB filing for bankruptcy, UBS purchasing Credit Suissie, FOMC meetings, and more. Each time these market-shaking events occur, traders look to take more extreme moves to protect their assets.
While gold options rise, the demand for physical gold follows suit. Physical gold demand reached an 11-year high in 2023 due to “colossal central bank purchases, aided by vigorous retail investor buying,” according to the World Gold Council.
Just this year, annual gold demand increased by 18% to 4,741 tons, excluding over-the-counter trading. This figure marks the highest level of demand since 2011. 2023’s success largely began at the end of 2022, when the last quarter’s demand rate reached 1,337 tons.
According to the World Gold Council, 2022 was the second-highest level of annual gold demand since 1950. 2023 is on track to maintain this trend or beat it.
March marked the first month of net gold ETF inflows in the last year, while bullish options trade volumes continue to approach record levels. Shorter-term options continue to trend upward as well, especially weekly options. Gold weekly options make up 22% of the year-to-date total volume, marking the highest level in recorded history.
Overall, gold trading options have reached 67,427 contracts per day, also signifying the highest level in recorded history. The figure has continued to rise steadily since 2021.
The price of gold has remained 8% up since June 2022. With the level of economic uncertainty we continue to face, plus gold’s ability to remain stable in such volatile markets, it only makes sense that the asset has been on everyone’s minds this year.
The next major hit that could cause serious ramifications across all asset classes will be the Federal Reserve’s July meeting. Many predictions point toward a rate hike, though nothing’s certain yet. The possibility of a recession has yet to dissolve, and hawkish actions could make the environment worse rather than better.
The gold options market positivity clearly shows how investors are responding to the current economic uncertainty. Gold remains one of the top assets of choice, though short-term options provide a lower level of commitment for beginner market exposure.
As always, investors should consult their financial advisors before making any portfolio decisions.
