Gold bulls rejuvenated by the Treasury Department’s efforts to keep US borrowing costs in check are turning to exotic options and spreads to bet on higher bullion prices.
US Treasury Secretary Scott Bessent’s plan to “at least double” purchases of outstanding 10- to 30-year debt pressured the dollar while lifting gold and its digital proxy, Bitcoin. Investors, hungry for hard assets in the face of eroding dollar purchasing power, have pushed spot gold up 10% in August, putting it on track for the biggest monthly climb since January, even after Friday’s retreat following Federal Reserve Chief Kevin Warsh’s pledge to fight inflation.
At the same time, Bitcoin short positions have been squeezed, driving a 12% surge since Aug. 19 that finally broke the token out of a months-long rut and sent it briefly through $80,000.
“Investors are back on the long gold trade via both underlying ETF demand and in the derivatives space,” said Aakash Doshi, global head of gold and metals strategy at State Street Investment Management. “The debasement trade was on pause, never dead, in my view, and it is back in vogue heading into September.”
Investors’ conviction in bullion is more subdued of late than at the beginning of the year, when President Donald Trump said he wasn’t concerned about the dollar’s decline, igniting a rally in gold. Traders have been buying large volumes of call spreads on SPDR Gold Shares ETF rather than just outright calls, and exotic options are also popular — both of which are less-expensive ways to bet on the rally.
“This August move appears far more orderly than the price action and derivatives activity observed during the January ‘Volmageddon’ in the precious metals complex,” Doshi said.
Implied volatility in gold options has risen, but not to the level seen in the first quarter, while the skew, or the premium paid for bullish bets, is also narrower.
“What’s different to the start of the year is that gold volatility is relatively lower, so there is a view from some investors that upside will be more capped on the next up-move and stay range-bound, for example a $4,900 to $5,300 range,” said Neeraj Chaudhary, Bank of America Corp.’s head of exotics and flow for Europe, the Middle East and Africa, as well as co-head of global hybrids trading.
Investors are also using dual-digital and other exotic options as a way of betting on the rally in gold, with the conditions that need to be met in a second asset reducing the cost of the bullish bullion wager.
Gold versus currency pairs have been popular plays, according to Chaudhary, with investors using the FX leg of the trade to cheapen the option cost. “For example, some investors have traded the gold/dollar-Japanese yen pair — you can buy correlation close to about negative 20% playing gold up/dollar up,” he said.
“We’ve seen requests playing gold and dollar-Swiss franc to be within these kinds of defined ranges at maturity,” Chaudhary added. “We’ve also seen some requests on triple binaries — for example, playing gold/oil/FX which gives you even more leverage on the payoff than the 10 to 20x that investors usually target.”
Bullion hasn’t been the only asset getting a boost from the weaker dollar, with Bitcoin’s surge also getting a jolt from short covering.
Between Aug. 19 and Aug. 21, more than $2.5 billion of bearish Bitcoin positions were liquidated in perpetual futures, according to Coinglass. The squeeze helped turn an initial macro-driven rally into a much sharper breakout. It also pulled money back into US-listed spot Bitcoin funds, which have attracted more than $2 billion since Aug. 19.
The open question is whether Bitcoin is now being treated more like gold — as a durable macro hedge — or whether this was mostly a positioning rally amplified by leverage and momentum. With shorts flushed out and profit booking now underway, the next phase of the move for the crypto token may depend less on forced buying and more on whether fresh spot demand is willing to keep chasing.
While Warsh’s pledge to fight inflation at Jackson Hole boosted rate-hike bets, taking some of the steam out of the precious metal rally late in the week, there’s no question that investors are flocking to gold.
“Gold dual digitals have been a dominant flow over the last few months, with gold typically serving as a bullish leg within cross-asset pairs,” said Joseph Khouri, BofA’s head of equity-derivatives structuring for EMEA. “The reason being that the investment case for gold doesn’t rely on a single macro outcome, there are multiple scenarios where gold rallies.”
This article was provided by Bloomberg News.