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Gold volatility reaches 9-month high on oil whipsaw

Adding to the pain for gold investors is a dollar rally that’s curbing demand for alternative assets.

Because gold traders often track the cost of oil, which can impact consumer costs and inflation, a whipsaw in crude futures is spurring the biggest price swings for bullion in almost nine months. Adding to the pain for investors in the metal is a dollar rally that’s curbing demand for alternative assets.

While gold dropped to a four-year low last month as investors saw less need for a store of value, prices surged on Dec. 1 by the most in 14 months when oil rebounded from a five- year low. Both commodities resumed declines yesterday. U.S. inflation expectations, measured by the five-year Treasury break-even rate, fell 24 percent this year, set for the biggest decline since 2008.

“Gold has been swinging along with oil prices in the past few sessions,” Atul Lele, who helps oversee $5.1 billion as the chief investment officer at Bahamas-based Deltec International Group, said yesterday in a telephone interview. “There are far too many negative factors pushing gold down, and the volatility that we saw because of oil will not lead to any upside in prices.”

On the Comex in New York, gold futures dropped 0.2 percent this year to $1,199.40 an ounce yesterday. The Bloomberg Commodity Index of 22 raw materials slid 11 percent as the MSCI All-Country World Index of equities gained 3.8 percent. The Bloomberg Dollar Spot Index rose 9 percent.

SocGen Outlook

The metal’s 60-day volatility is near 16, the highest since mid-March. Prices jumped 3.6 percent on Dec. 1, the biggest one- day gain since September 2013, after crude jumped 4.3 percent, the most since August 2012. The metal fell 1.5 percent yesterday as oil resumed its decline and the dollar reached the highest since 2009.

The outlook for gold remains bearish, according to Societe Generale SA. The metal will remain in a downward trend as long as prices don’t climb above $1,225 to $1,240, Stephanie Aymes, head of technical analysis at the bank in London, said yesterday in a report. Bullion may slip to about $1,085 in three months, Aymes said.

Volatility is climbing across commodity markets as a slump in raw materials drives the value of oil and corn near their costs of production.

The Bloomberg Commodity Index slipped to a five-year low this week, while the gauge’s 60-day historical volatility surged to the highest since September 2012. Supply gluts and the threat of slowing economic growth in China have driven crude, copper and soybeans into bear markets.

ETF Swings

Options that protect against declines in a popular fund tracking gold have risen in price to the highest in 15 months compared with a similar gauge for U.S. equities, according to data compiled by Bloomberg. The Chicago Board Options Exchange Gold ETF Volatility Index, which tracks derivatives prices on the SPDR Gold Shares exchange-traded fund, climbed 19 percent last week to 25.17, the highest in more than a year.

Bullion dropped to the lowest since 2010 last month, as the dollar rose and amid waning demand for a hedge against inflation. Federal Reserve officials have warned that lower energy prices could hold down consumer costs in the near term. Oil has collapsed into a bear market amid the highest U.S. output in more than three decades and signs of slowing world demand growth.

Holdings in global exchange-traded funds backed by bullion are at the lowest since 2009, after dropping for six consecutive weeks. Gains for the U.S. economy have sparked concern that the Fed is moving closer to raising borrowing costs. The outlook for higher interest rates erodes the allure of the metal, which generally offers investors returns through increasing prices.

“The dollar’s strength is gold’s biggest enemy,” Fain Shaffer, the president of Infinity Trading Corp. in Indianapolis, said yesterday in a telephone interview. “Gold has been dancing to oil’s tune, but going forward, it will mostly be about U.S. interest rates and the economic data.”

©2014 Bloomberg News

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