Author: Aleksandar Adamovic

We have been covering the theme of crowded trades lately. One of the more crowded trades has been the short volatility trade that has over past weeks blown up. The strategy of picking up dimes in front of the steam roller worked until it abruptly stopped. The short VIX (and other equity related volatility) trade has seen the short crowd run to the exits.

We are seeing another day with rather horrible equity price action. Major indices are all falling hard despite pundits on media talking about the 200-day average etc. Where markets will go we leave to them to discuss.

We mentioned the gold space being another crowded trade where we have seen “smart” money short the shiny metal for a long time. The trade has worked until we saw that massive day higher some 2 weeks ago. Since then gold has been in a small consolidation. Today we are seeing gold take another leg higher, currently above the 100-day average. Key for this move to continue higher is a close above the 1230 resistance level.



Volatility in gold works a bit different to other asset classes. Usually we have falling volatility as gold goes up. Lower implied volatilities offer cheap ways to play directional bets. We have seen implied vol in GLD US (Gold ETF) fall over past sessions. This offers cheap ways to gain exposure for directional moves in gold such as call spreads for example.



Another space to watch closely is the gold miner sector, best played via the GDX US. The sector has been in a small consolidation after the move higher we saw recently and should today go higher given the gold move so far. Note the 100-day average around the 20.35 level.



Global inflation, the fundamental driver of gold, seems still muted. If equity markets are going higher or lower nobody knows, but given the fact gold is a crowded short space, and the possibility of a few investors “rediscovering” the safe haven attributes of gold, a further possible fear in equity markets could be hedged via gold.

Below is a chart of VIX (orange) vs gold (white) over past 30 trading sessions.