NEW YORK, June 20 Gold option volatility notched its biggest one-day gain in a year on Thursday, reviving a lackluster market as Iraq turmoil and the Federal Reserve's comments on interest rates unleashed a wave of short covering and pushed prices up over 3 percent.
The CBOE Gold ETF Volatility index, often referred to as the "Gold VIX", soared 20 percent on Thursday to 13 as spot bullion had its best day in eight months, climbing 3.5 percent on "frantic" short covering.
The gauge is a 30-day risk forecast of options based on the SPDR Gold Trust, which on Thursday also had its busiest trading day since mid April last year when bullion posted a record two-day $225 drop.
The index, however, was hovering just above 12, its lowest level in at least five years, Reuters data shows.
"Yesterday's $50 move in the metal was enough to get people back to use options as an investment tool and to hedge themselves," said Thomas Capalbo, precious metals trader at brokerage Newedge.
The 30-day gold at-the-money options implied volatility index, another proxy for investor expectations for gold price volatility, gained its most in a month to 13 on Thursday.
BROAD DECLINE IN VOLATILITY
While the increase was significant, reinvigorating the market sentiment after months of rangebound prices and low volumes, it was coming off low levels.
The GCAMTIV measure has been declining steadily this year, hitting 11 on June 10, its lowest since early April last year before bullion's historic drop in the second half of the month.
It is also a far cry from 60 in October 2008 at the height of the global credit crisis.
The low volatility reflects weak investor interest, with bullion under pressure over the past year, as a better U.S. economy and expectations the Federal Reserve will raise interest rates next year dampened bullion's investment appeal as a hedge.
That outlook shifted slightly on Thursday after the Federal Reserve's lack of commitment to raise interest rates pressured the dollar. Tensions in Iraq have also renewed bullion's safe haven appeal.
Still, analysts say billions of institutional cash is still sitting on the sidelines, leaving little real momentum to sustain prolonged rallies. Spot prices slipped 0.38 percent to $1,315.39 an ounce on Friday.
Bullion's wild gains on Friday contrasted with other markets. The equities volatility index fell to 11 on Friday, its lowest in more than seven years, as investors poured in while the S&P 500 equities index rose to record highs. (Reporting by Frank Tang)