Gold and Silver Options Pointing to a Pullback?

  • 23 Oct 2019
  • By Erik Norland
  • Topics: Metals

After gold and silver’s powerful rallies over the past 15 months, perhaps it’s not surprising that prices of both  came off a bit in September and early October. After rising over 30% between August 2018 and early September 2019, gold corrected by about 6.5%.  Silver’s bull market began this May and prices rallied 35% over the summer, which was followed by a 14% correction over the past month-and-a-half. 

Prior to the declines, options markets signaled that a correction might be on the way.  Out-of-the-money (OTM) calls became exceptionally expensive for both gold and silver just before the correction (Figures 1 and 2). 

Figure 1: Gold Options Were Rarely More Positively Skewed Than in Early September.

Figure 2: Silver Options Achieved Record Positive Skewness in Early September.

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.

Figure 3: Gold Options Have Rarely Been so Positively Skewed.

Figure 4: Silver Options Achieved Extreme Skewness Over the Summer and Remain Positively Skewed.

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.

Figure 5: When Gold Options Skewness Gets into the Upper 30% of its Range, Gold Prices Often Fall.

Figure 6: Highly Positive Skewness on Silver Options Often Precedes Price Corrections.

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.

Figure 7: A Correction in Short-Term US Interest Rate Expectations Triggered the Selloff in Gold.

Bottom Line

  • Silver and gold options achieved exceptionally positive skewness late this summer.
  • Exceptionally positive options skewness often precedes corrections.
  • Even as of mid-October, gold and silver options skews remain unusually positive.
  • On a fundamental basis, gold and silver will likely follow Fed rate expectations & the dollar.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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