USD strength and profit-taking are weighing on precious metals today. What are implied EFPs and ATM volatility telling us?

December Gold EFP settled in the broker market at $56.50, a decent $3 move lower from yesterday, as gold itself is down approximately $50 on the day so far. The WatchGold platform is displaying an implied EFP of approximately $56.60.

Even with the lower gold price, the yield implied by a $56.50 December EFP remains relatively high at approximately 4.4%, still well above both London OTC forward rates and USD SOFR.

I suspect some banks may now be starting to scale in and cover the EFP, particularly if they put positions on at higher implied rates during the significant CTA short covering and concentrated buying we saw over the past week. As those flows begin to normalize, it makes sense that some of the EFP premium could start to come back in.

Volatility is telling an interesting story as well. One-month ATM implied volatility has moved lower alongside the decline in prices, with gold around 21.7% and silver around 41%. This likely reflects both the pullback in prices and some position unwinding following the recent rally. Lower implied volatility is encouraging and, if sustained, should hopefully translate into less violent price swings and less vicious selloffs.

Crude oil is down approximately 1.6%, which ordinarily should provide some support to precious metals. However, the stronger U.S. dollar appears to be having the greater influence today, as the market has not completely abandoned the “higher for longer” U.S. interest-rate/FOMC theme.

Overall, today's move looks like a combination of USD strength, profit-taking and some unwinding after the recent rally. The decline in both the Gold EFP and implied volatility is consistent with some of the recent positioning pressures beginning to ease.