Gold ‘N’ Volatility

Hey Traders,

It was another up week for the markets, with the S&P 500 (Ticker: SPX) notching yet another record close on Friday …

And, notably, we saw the CBOE Volatility Index (Ticker: VIX) close at a post-pandemic low on Thursday and Friday, ending the week below 16!

It feels like things are starting to truly get “back to normal” … whatever “normal” is!

We know that oftentimes, equities and volatility (SPX and VIX) often have an inverse relationship. 

In other words, one rises as the other falls. (Of course, if you’re a reader of my VIX Edge newsletter, you know this is an incredibly simplified rule of thumb.)

This is why you’ll often see traders use the VIX to hedge their portfolios. For example, if you see your stocks taking a nosedive … there’s a good chance your VIX calls are looking pretty good. 

Catch my drift?

Of course, there’s an even more popular hedge that investors flock to when they’re wary of a market decline …

Good old gold!

Gold is typically seen as a “safe haven” for investors, so we’ll often see a rise in gold prices when volatility is rising, or when equities decline. (If you attended Thursday’s special event, you probably know all about this by now!)

Especially relevant is the fact that gold also tends to thrive during times of inflation. As currency loses value, gold is seen as a reliable way to “lock in” value.

And unless you’ve had your head buried in the sand over the last several weeks … you know inflation is the talk of the town right now.

But surprisingly, I’m not seeing the kind of action I’d expect out of gold …

Now, you might say “But Mark, inflation isn’t certain, and you just said the VIX closed at a post-COVID low!”

And you’d be right.

But there’s still plenty of market uncertainty, especially uncertainty related to gold.

New regulations out of Europe are set to go in effect on June 28, and the gold derivatives market could be totally, completely changed, with over $40 billion in gold derivatives set to unwind.

There’s also rampant speculation that China may be set to reveal massive gold stockpiles, which could spell trouble for the U.S. (Again, check out this past Thursday’s live broadcast for more details.)

So in theory, it’s likely we’ll see some uncertainty unfold as we try to figure out how these developments will affect the market.

And typically, uncertainty leads to volatility.

But …

Volatility is low …

And correspondingly, the implied volatility (IV) of gold is EXTREMELY low.

Take a look at the 30-day IV of SPDR Gold Trust (Ticker: GLD), perhaps the most well-known gold ETF.

It’s sitting just above its 52-week low, indicating GLD options are almost the cheapest they’ve been in the last 12 months, in spite of the new gold regulations and inflation fears!

Gold even has its own volatility index: the CBOE Gold Volatility Index (Ticker: GVZ).

GVZ has also been floating around near its annual lows …

Chart courtesy StockCharts

Unlike the VIX and SPX, gold prices and gold volatility aren’t negatively correlated. As gold prices rise, gold volatility can spike right alongside it, given that gold and volatility both tend to increase with increased market uncertainty and market turbulence.

So what can we take out of this?

Right now, gold options are cheap. Probably about as cheap as you’re going to find them.

If you think the potential catalysts on the horizon could serve to boost the precious metal, now might not be a bad time to make a long move on gold.

Here at Option Pit, our Commodities Expert Bill Griffo is certainly getting in on gold. Last week during our live broadcast he told traders all about the impending gold regulations, and what they could mean for gold, the U.S. dollar, and volatility. 

On Monday, he’ll be joining me for my Volatility Edge Live presentation to give even more details on this critical market event, so we’re able to get in early and play it to our advantage.

Even more important, he’ll be letting us in on his #1 trade to make before June 28

Join us before Monday if you want in.

Your Only Option,

Mark Sebastian

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