For both gold and silver options, a two-year rolling diffusion index of their risk reversal skewness (0.15Δ OTM call – 0.15Δ OTM put implied volatility) got into the 99th percentile (Figures 3 and 4). During the past decade, when skewness has achieved extreme levels by the standards of the previous two-year period, gold and silver often underperformed over the next three months (Figures 5 and 6). That appears to have been the case once again.
What could be particularly troublesome for those hoping that the two metals will continue higher is that even after the recent sell off, gold and silver options markets remain skewed upward to an unusual degree. As of October 11, 2019, gold options 0.15Δ risk reversal skew was still in the 80th percentile, while silver’s was around the 87th percentile. Over the past decade, similar percentile skew rankings have often corresponded to a 2-4% subsequent decline in gold prices and a 4-10% subsequent decline in silver prices over the next three months. One should note, however, that there is a great deal of uncertainty regarding how gold and silver will behave over the next few months and that their past performance and past relationship to options skewness may not be indicative of how they will perform over the next few months.
Both metals’ usual drivers are still very much in place over the longer term:
- Steeper rate cuts than those currently priced into the forward curve would likely prove bullish
- A weaker US dollar would probably also prove bullish for gold and silver
Indeed, the reining in of expectations for Federal Reserve (Fed) rate hikes probably triggered the recent pullback in gold and silver (Figure 7). That said, the options skewness preceded that correction with a clear warning.