Brad Zigler: Options Offer Clues To Gold's Direction

February 03, 2011

Where does gold head next? The yellow metal's volatility may hold the answer.


Gold's weak response to the Egyptian crisis has puzzled many investors. You'd think the market would reflect growing fear, sending gold prices higher. But despite Wednesday's escalation in violence, bullion prices slumped $8 an ounce. The price decline bespeaks an overreaction on Friday, when gold jumped $14/oz.

Such is volatility. But gold market volatility has actually diminished recently. Or, rather, expected volatility—as measured by the options market—has shrunk.

The CBOE Gold Volatility Index is derived from the implied volatility in SPDR Gold Shares Trust (NYSE Arca: GLD) option premiums. And if you've tracked it over the past couple of months, you probably have noticed that readings have moved into an ever-tightening range:


CBOE Gold Volatility Index Vs. London A.M. Fix

CBOE Gold Volatility Index Vs. London A.M. Fix


Investors with experience in chart reading may recognize the pattern that's developed; the "wedge" is predictive of a breakout move. But the question now is whether that breakout will occur against a background of higher or lower gold prices.

Gold's recent track record and a little probability theory can help sort out the odds.

First, we need to get our volatility bearings. GLD's history reiterates a pattern of falling prices accompanied by low variance:


Recent GLD Volatility

Period HighPrice LowPrice PeriodGain/Loss ActualVolatility
Last 30 days 138.00 127.93 -5.5% 16.3%
Last 60 days 139.11 127.93 -5.5% 15.9%
Last 90 days 139.11 127.93 -0.9% 17.5%


GLD's current volatility readings are historically low; in fact, they are in the tenth percentile of the trust's 600-day range. In comparison, the average CBOE Gold Volatility Index reading since its 2008 inception date is 27.1 percent.

With this data in hand, we can forecast the probabilities of breakout moves over one-, two- and three-month horizons.


The Next 30 Days

GLD Price


End of



During Period

> 138.00



< 127.93



In Between




Currently, GLD trades at the $129-$131 level, closer to the trust's 30-day low than its high. Odds are better than even that GLD will finish the next 30 days at a price within its near-term range. The possibility of a downside excursion sometime within the next month, however, is better than 2-in-3.

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