Gold offers a hedge against a potentially depreciating dollar as dollar depreciation will result in higher gold prices as denominated in dollars. QE3 may have the effect of a lower relative value of the dollar and the result of this announcement was SDPR Gold Shares ETF (GLD – 171.80) closing over 170.00 for the first time since late February. With several potential market moving catalysts now in the rear view mirror and gold moving up in price, the implied volatility of GLD dropped almost 6% on the week and the curve of GVZ futures contracts dropped as well resulting in a parallel shift in prices. As an interesting note – the holdings of all gold related ETFs reached a record high this week with 72.5 million ounces of physical gold. This means gold related ETFs hold more gold than the governments of Italy and France. I love stats like that.
On the oil side of things the price of oil topped the psychologically significant $100 level last week and implied volatility of USO options moved up as well with OVX rising to 34.07 from 32.77. It is widely known that anti-American protests are popping up throughout the Middle East. When there is geopolitical uncertainty in that part of the world oil usually moves up and as implied volatility is a measure of uncertainty it would be expected to move up as well.
The price action on the OVX curve tells an interesting story. OVX was higher and the September future rose as well. However, the September OVX future closed at a slight discount to the index on Friday. October, November, and December OVX futures actually lost value on the week. They are all still at a premium to the index, but this premium is pretty slight compared to the past few months. What this may be saying is the financial market believes whatever uncertainty there may be about the price of oil is going to be short lived. Hopefully this may be taken as what we see going on in the Middle East will quiet down fairly quickly and the political risk premium in the price of oil will drop as well.