Gold: Recovery rally weakens demand for put options

• Gold has gained significant ground over the last couple of weeks. 
• The options market has turned bullish on gold, validating the recent price rise.

Gold’s recent recovery rally has forced option traders to rethink their bearish bias. 

The yellow metal bottomed out near $1,515 on March 20 and was last seen trading near $1,650 per ounce, representing a 0.38% gain on the day. Prices hit a high of $1,678 on Tuesday. 

With the price rise, one-month 25 delta risk reversals, a gauge of calls to puts on the safe-haven metal, has recovered from the multi-year low of -4.5 to above zero, indicating a bearish-to-bullish change in the sentiment in the options market. 

At press time, one-month risk reversals are seen at 0.45, having hit a high of 2.92 on March 26. A positive figure indicates that demand for call options or bullish bets is higher than that for put options or bearish bets. 

The bullish reversal seen in the options market validates the rally seen in the spot market. The global equity markets have also witnessed a double-digit recovery rally from the lows seen in March, largely due to the massive fiscal and monetary lifelines launched by major central banks and governments across the globe. However, analysts think the equities are not out of the woods yet, as the coronavirus outbreak is likely to keep the economic activity depressed for a longer-than-expected time. As a result, gold could continue to attact haven demand in the near-term. 

Risk reversals