When the so-called "Trump Rally" finally met some resistance in March, one of the clear winners was the gold sector.
What's even more interesting about the strength in gold is that it came on the heels of the Federal Reserve raising interest rates for the second time in three months (after only one raise in roughly a decade).
Gold tends to be negatively correlated to interest rate movement, because rising rates catalyze strength in the US Dollar - and gold typically moves in the opposite direction of the US Dollar.
The fact that gold was able to stage a rally in March despite the quarter point hike in interest rates is therefore notable.
Gold is often referred to as a "safety asset," because investors tend to rotate into this precious metal during times of market anxiety. According to the Skew Index, which measures the degree of put buying versus call buying, market anxiety did spike in recent weeks, which could help explain why gold found a bid.
Developments related to the presidency of Donald Trump may be contributing to increasing uncertainty. Despite holding a majority in both the House and the Senate, Republicans were unable to agree recently on a solution for repealing and replacing Obamacare.
The lack of progress on health care may have some investors worried that other business-friendly initiatives (such as tax reform) may not be so easily implemented - or at least not as quickly as anticipated.
The mechanics of recent action in gold futures may provide a helpful insight into future trading opportunities in precious metals. If equity markets start to lose their footing again, it's possible that gold may once again quickly find strength - offering a potential opportunity for traders.
Outside of the political wrangling in Washington DC, gold should also be monitored alongside data related to the US economy. Two more rate hikes are currently expected in 2017, but that could change quickly if economic conditions deteriorate.
If the economy starts to sputter, further interest rate hikes may be tabled - consequently weakening the US Dollar and strengthening the price of gold.
Depending on your current holdings and strategic approach, you may also want to consider trading volatility (instead of direction) in gold-related products. If you do, it's important to consider that inverse skew is often observed in gold options.
A previous installment of Market Measures focuses on skew in gold products and uses historical data to illustrate how upside calls often trade at higher premiums than downside puts.
If a trader did decide to get long a gold product due to market uncertainty, high premiums in upside calls may allow for a covered call strategy to be incorporated with the long gold trade.
We hope you'll take the time to review the full episode of Market Measures focusing on inverse skew in gold products when your schedule allows.
If you are interested in learning more, a previous installment of Futures Measures focusing on recent activity in the gold market is also recommended.
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We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.