As we all know, the price of gold has increased drastically over the past year to reach an all-time high of $1200 per ounce. However, we have now seen a continuous three-day drop in the price of the precious metal. This can be seen through the jump in the price of puts on the gold ETF GLD. The implied volatility of 10% out-of-the-money puts with three months expiry period has become higher than the same figure for relative calls. In other words, investors are more cautious about a further increase in the price of gold, and are buying puts to hedge against an expected decline.
Further contributing to the decline of gold is the rally of the U.S. dollar. This recent run-up has been aided by Fitch’s downgrade of Greece’s debt to BBB+ with a negative outlook. As a result, investors are worried about deteriorating credit ratings in other world markets, causing a flock to the “safest” reserve currency.
The combination of these two events has and will continue to put downward pressure on gold, as well as oil and other higher-yielding currencies.
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Silver still looks cheap here adjusted for inflation in 1980 at its peak of 50 dollars an ounce. It would be trading at 200+ dollars an ounce today or even 250. And gold adjusted for its high of 1000 dollars an ounce in 1980 would be at 4000 or 5000 dollars an ounce. So I don't believe we have seen the top in gold or silver yet not even close to it.
I believe they both have a long way to go from here.
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