Gold and silver made significant moves in 2024, with the yellow metal hitting an all-time high of over $2,800 in November, while silver rose to its highest levels since 2013 (Figure 1). However, if one looked at the overall level of implied volatility on gold and silver options, one might not have guessed the scale of the price moves. Neither gold nor silver options implied volatility changed much in 2024, as indicated by CME Group’s comprehensive CVOL measure (Figures 2 and 3). That said, implied volatility did fall sharply for both metals during the post-election price correction.
Figure 1: Gold rallied to a record and silver to multi-year highs pre-election
Figure 2: Gold implied volatility has been at average to somewhat low levels thus far in 2024
Figure 3: Implied volatility on silver futures options has also been at moderate levels
During the selloff, the skew on gold and silver options, which had been positive earlier in the year with out-of-the-money (OTM) calls substantially more expensive than OTM puts, headed back towards neutral (Figures 4 and 5).
Figure 4: The post-election correction in gold prices has taken the skew back towards neutral
Figure 5: The post-election decline in silver prices also dampened silver’s normally positive skew
Here are what we see as some of the major influences on gold and silver prices going forward that could impact both overall implied volatility and skew:
Rate expectations
Gold and silver prices both typically react negatively to changes in interest rate expectations (Figure 6). During Q3, Fed Funds futures went from pricing relatively few rate cuts to pricing the Fed would likely lower rates to 2.75% from above 5%. Thus far in Q4, rate expectations have moved back in the opposite direction, and this may have contributed to the post-election correction in precious metals’ prices (Figure 7). This move happened amid solid employment gains and stubborn core inflation, which has stablized at around 3.3% for the past six months and remains well above the Fed’s inflation target of 2%.
Figure 6: Gold and silver correlated negatively with changes in Fed rate expectations
Figure 7: Fed rate expectations have been very volatile for the past three years
The U.S. Dollar, Tariffs and Sanctions
While gold and silver are usually classified as commodities, they are also considered monetary assets. The world’s largest holder of gold is the Federal Reserve (Fed). Moreover, after being net sellers of gold for most of the period from 1982 to 2007, central banks from 2008 onward have been net buyers of gold every year, and their pace of buying appears to have accelerated in 2024 (Figure 8). This tells us two things: first, central banks see gold as a monetary asset; and second, they would prefer to accumulate gold more than to build reserves of other currencies.
Figure 8: Central banks have been net buyers of gold since 2008
Gold and silver tend to correlate negatively with the U.S. dollar. When the Bloomberg Dollar Index (BBDXY) rises, gold and silver prices tend to fall (Figure 9). Since early October, BBDXY has risen by 6.5% due in part to stronger U.S. economic data and the prospects of potential tariffs. Tariffs might be dollar-bullish, at least in the short run, for three reasons:
- Tariffs raise revenue, which can narrow the budget deficit or be used to fund tax reduction in other areas such as corporate or individual income that could boost productivity growth. Currencies tend to react positively to reduced government budget deficits.
- Increased tariffs could also narrow the U.S. trade deficit by raising the prices of imported goods. Currencies tend to rally when trade deficits shrink.
- Tariffs could also raise consumer prices and lead to fewer rate cuts from the Fed. Currencies tend to outperform when markets shift towards higher interest rate expectations.
Figure 9: Gold and silver have a strong negative correlation to BBDXY, which has been strong recently
By way of concrete example, in 2018 when the U.S. placed tariffs on many Chinese-made goods, the U.S. dollar (USD) rose by 10% versus the Chinese yuan. Also, any potential changes to sanctions on Russia could impact the USD and demand for gold.
All of these points constitute major volatility risks for precious metals prices in 2025. It’s not clear, which, if any, tariffs will be implemented, and one should not ignore the possibility that other countries responding to any U.S. tariffs by putting up barriers of their own against U.S. exports. Moreover, the outcome of the Russo-Ukrainian war and related sanctions remains highly uncertain.
It’s also worth pointing out that the combination of large budget deficits and falling interest rates could keep a strong bid in precious metals prices in 2025. In the U.S., the budget deficit is running at 7% of GDP. It’s about the same in Italy, and nearly as large as in China, France, Japan, Spain and the UK Moreover, outside of Brazil and Japan, most central banks are cutting rates. The combination of large budget deficits and falling rates could boost the appeal of hard assets like gold, silver and crypto currencies going forward, potentially creating strong trends that are subject to sharp pullbacks. In this environment, the advent of weekly options on gold and silver can also offer traders in these markets greater flexibility for their hedging needs.
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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 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.
