Volatility in the Gold market, both realized and implied, has dramatically declined during the past year as evidenced by the following two charts:
Gold (daily)
The average true range (14 days) for gold has fallen by 50% since October 2013 and currently sits at its lowest level since last March (just before gold crashed $300).
GVZ (CBOE Gold Volatility Index)
Gold implied volatility (calculated using GLD options) has also sharply declined since last summer and currently rests at historically low levels.
Why the sudden reduced volatility in gold? And what clues does this offer us about what might be next for gold?
- Retail investors became disenchanted with the yellow metal after last April’s gold crash and haven’t returned.
- Gold futures open interest has fallen by over 50,000 contracts since last April reflecting an overall disinterest in gold.
- After such a large decline as gold experienced last year, it is normal for a market to stabilize at a new level for a period of time ($1300 appears to be this level).
- An increasing number of mid-tier gold miners are back to hedging future production into rallies.
- Central bank monetary policy has begun transitioning from a period of extraordinary accommodation to a period of steady ‘re-normalization’ (the gold price reflects this shift).
What does the current period of stabilization mean for the future of gold? If history is any guide, the current period of low volatility won’t last for very long and the long term gold uptrend will begin reasserting itself shortly.
by CEO Technician