Don't Trade Gold, Trade Gold Volatility
By: Last week, noted provocateur John Carney boldly suggested that hedge funds short gold into the recent rally.
Bold?
Yes. But if shorting into a global rally of uncertain proportions is more than your stomach lining can handle … here are 3 other ideas to play the rally.
1. Trade the volatility.
While the price of gold has been making a series of higher highs, implied gold volatility has been trending near the lows of the year.
Why is this important? Well, for one thing it’s unusual. Adam De Chiara, Jefferies Asset Management co-President, says there is normally a much higher correlation between higher commodity prices and higher volatility. Gold volatility (ticker: GVZ) is hovering around 18 while stock volatility as measured by the VIX is trending above 22.
The spread implies that stocks will be more volatile than gold.
Believe it? Neither does Scott Fullman, Director of Derivatives Investment Strategy at WJB Capital Group. But, while an interesting idea, he is not ready to jump in just yet.
2. Options on futures.
Another way to trade volatility is options on futures. Believe Carney?
Get long puts. Want to bet against Carney? Get long calls. But at current volatility levels with near zero interest rates, gold options are cheap. And with volume up 68% year to date for gold options (as reported by the CME), liquidity has never been better.
3. Spread the risk.
Silver has been the outperforming gold this year, up about 27% while gold has lagged gaining just 18%. But if you believe silver will get produced regardless of demand (silver is a byproduct of gold production, copper production etc.), and that gold will catch up trade the ratio by getting long gold and short silver.
Or if you believe gold is a useless rock, short gold and buy platinum – it’s a metal that’s actually needed for commerce (auto catalysts) and jewelry. Its produced in South Africa and Russia and nobody is entirely sure of how big the Russian stockpiles are or if the lights will stay on in South Africa.
With both metals largely in uncharted territory, it’s anyone’s guess where the next big move will be but it’s unlikely that either metal will stay put.
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