By Treasure Coast Bullion Group -

Gold bullion prices have been very choppy in 2018, but also very stable, climbing less than $9 per ounce so far in the new year. One of the reasons prices have been contained is the relatively low levels of volatility that are implied by gold option prices. In comparing gold volatility implied by gold options with the volatility implied by options on the S&P 500 index, current levels are near historical lows. In fact, the ratio of S&P 500 volatility relative to gold volatility has only been above 1.5, 4-times in the past 9-years, with current levels as the 5th occurrence. The question is why this is happening and historically what happens to gold prices once this occurs.

How is Implied Volatility Used?

The volatility that is implied by market participants is called “implied volatility”. This is defined as how far market participants believe a market will move, in percentage terms, over the course of the next 12-months. Implied volatility is used to price options because the value of an option is based on the likelihood that it will be in the money before the expiration date. How quickly the underlying will move is calculated by using implied volatility.

Current Market Environment

Historically, gold has been viewed as an alternative asset, which can help create a diversified investment portfolio. The historical correlation between gold and the S&P 500 index on average is approximately zero if measured on a weekly basis using a 50-week correlation. This means that although gold sometimes moves in tandem with stock prices, most of the time, it beats to its own drum.

Gold also has historically been viewed as a safe haven asset, which allowed prices to benefit as market volatility rears its ugly head. Recent volatility in riskier assets has not buoyed gold prices, as money appears to have found a different home. Volatility ETF’s appear to have been the beneficiaries of recent market volatility pushing the VIX volatility index up to all time highs relative to gold implied volatility ($GVZ).

The chart above shows the S&P 500 volatility index (the VIX) relative to the gold implied volatility index the $GVZ. Early in 2018 the VIX made an all-time high relative to the gold volatility index, pushing the ratio up to 1.95. This means that while implied volatility in share prices moved to elevated levels, more than doubling since hitting a low below 9 in early January, gold volatility has been subdued. Since the gold volatility index was established in early 2010, the ratio of the VIX relative to the GVZ has increased above 1.5 only 5-times including the recent surge seen in early 2018. The question for investors is what has happened when this phenomenon occurred in the past.

In August of 2010, when this first occurred, gold bullion prices continued to rally within a trend that lasted until late 2011. In the second instance in late 2012, prices rebounded by approximately $100 per ounce after falling from its peak in mid-2011. During the summer of 2015, the third time the ratio moved above 1.5, gold prices climbed approximately 7%, before turning over in late 2015. In the last instance in early 2016, gold prices found a bottom and rallied approximately 28% before finding a top in the summer of 2016.

Summary

The current market environment has provided a very choppy low volatility market environment for gold. Investors do not seem to be concerned about prices moving quickly which has allowed the ratio of the implied volatility on the S&P 500 to increase to nearly double the levels seen with implied volatility in gold prices. Historically this scenario has foreshadowed a quick change in gold prices.

If you believe prices are poised to make a move and you are looking to take advantage of a time to add precious metals to your portfolio, click on this link to get access to your Investment Kit or better yet, give us a call today at 800–982–6105.

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Good Investing,

Treasure Coast Bullion Group