Gold: Risk reversals retrace bullish bias

Gold fell sharply last week as the Fed reaffirmed policy tightening stance. The demand for gold call options (bullish bets) has dropped sharply in the last six days, adding credence to bearish technical setup.

Gold (XAU/USD) is currently trading at $1,210, having dropped close to 2 percent last week.

A major chunk of that drop happened on Friday - a day after the Fed reaffirmed its hawkish policy stance, setting the stage for a 25 basis points (bps) rate hike in December.

The price drop has likely put the bears back into the driver's seat. Notably, the demand (or the implied volatility premium) for the call options has weakened sharply since last Tuesday. For instance, the one-month 25 delta risk reversals (XAU1MRR) are currently being paid at 0.125 XAU calls vs 0.90 XAU calls last Tuesday.

The falling demand for XAU calls could be considered a sign that investors are expecting (and hedging for) a further drop in gold prices.

XAU1MRR

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