Gold investors wrestle with Brexit vote in wild options dealings

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New York | Published: June 23, 2016 9:48:28 AM

Gold investors piled on near-term bullish and bearish options bets on Wednesday, racing to protect against whipsawing prices as Britons head to the polls...

GoldSpot gold prices fell for the third straight session on Wednesday, dropping to a two-week low of ,261.01 per ounce. (Reuters)

Gold investors piled on near-term bullish and bearish options bets on Wednesday, racing to protect against whipsawing prices as Britons head to the polls to decide on the future of their European Union membership on Thursday, data showed.

Implied volatility, a measure of options activity, in Comex July gold calls and puts with strike prices that are as much as $50 higher or lower than current prices soared to record highs on Wednesday.

A vote for Brexit is expected to spur a rush to safe haven assets like bullion.

Also Read: Brexit or Bremain: What will Britons choose?

The frenzied deal making and diverging strike prices suggested dueling forces as investors grew nervous about the potential impact of the vote on the market – prices could fall or rise by as much as 5 percent.

It was most evident in bullish bets. COMEX July gold calls that give the holder the option to buy at $1,300 per ounce and $1,325 were some of the most actively traded on the day.

Activity in July puts with strike prices of $1,200 and $1,220 was also almost as busy.

They all expire on Monday.

Combined turnover in the four contracts equated to close to 638,000 ounces of bullion worth more than $800 million.

Spot gold prices fell for the third straight session on Wednesday, dropping to a two-week low of $1,261.01 per ounce.

Implied volatility typically rises ahead of expiry, but traders said dealmaking has been more pronounced than usual, amid heightened risk appetite and nervousness about the result, traders said.

“We’re at a line in the sand on which way we’re going to go and that’s why we’re seeing implied volatility in puts and calls spike right now,” said Adam Packard, vice president operations at brokerage Zaner Group in Chicago.

Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York, said flight to safe haven amid uncertainty over Brexit could push prices to as high as $1,375, the loftiest since March 2014.

An “In” vote is seen as quickly unwinding gold’s 5-percent gain in June, as appetite for risk rises and focus returns to the U.S. economy.

Prices hit their highest since August 2014 last week as the $5-trillion-a-year gold market rose with other “safe” assets, such as German bunds, the Swiss franc and Japan’s yen.

Premiums of some out-of-the-money calls were more than two times the cost of out-of-the-money puts, suggesting a more bullish sentiment, said Packard.

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