Gold rose for a third day on Tuesday, driven by a weaker dollar and uncertainty over the outcome of a confidence vote in Greece that may determine whether the country can avert a default on its sovereign debt. Bullion also got a lift from a return of investor risk appetite across-the-board, as the grains, commodity and equity markets all rose.
On the options front, gold volatility has dropped by nearly one-fifth from its peak in mid-May, as prices of the underlying gold futures have largely been rangebounded after rallying to a record $1,575.79 on May 2.
"Gold has been split between taking its cue from the changes in sovereign risk, but today the sovereign risk has declined and the euro ... has rallied and gold is choosing to track the euro more than it is the reduction in sovereign risk," said James Steel, chief commodities analyst at HSBC.
Spot gold was up 0.4 percent at $1,546.04 an ounce by 11:41 am EDT (1541 GMT). US August gold futures gained $5.10 to $1,547.20 an ounce. Silver touched $36.52 an ounce, its highest since June 10, and was last up 1.3 percent at $36.46. The CBOE gold volatility index, a bullion market fear gauge, was near its lowest level in two months at below 17, as the price of the underlying gold futures moved in a range between $1,510 and $1,550 in the last 30 days.
Jonathan Jossen, an independent COMEX gold floor option trader, said a major dealer sold a sizeable position in straddles. A straddle is an options plan in which an investor aims to profit on volatility through a call and a put with the same strike price and expiry date. Sale of a straddle position indicates that less volatility is expected. "If you think there is volatility you don't really do that. I am not seeing anybody put on a play for a move," Jossen said.
Bullion investors will closely monitor political developments in Greece, where the cabinet of Greek Prime Minister George Papandreou faces a confidence vote late on Tuesday, the first of three tests the government must survive to avert the eurozone's first sovereign debt default.
"Uncertainty still haunts market participants with small-scale safe-haven buying pushing bullion prices back up," said Andrey Kryuchenkov, analyst at VTB Capital. Gold in euros, which is less than 1.5 percent below a record 1,088.11 euros an ounce, was trading down 0.5 percent on the day, reflecting the pick-up in the single European currency against the dollar.
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