The tremendous rally in Gold this year has at times seemed somewhat reasonable. The Chinese markets brought volatility to America’s Stock Markets and “Brexit” provided a continued element of uncertainty to worldwide markets. The Post-Brexit environment however, has been nothing but up for U.S. Equity Markets and without uncertainty in these markets, what’s propelling Gold Prices?
The Chart below shows a three year comparison between the price of E-mini Futures and Gold. Although the correlation between the two markets is currently quite high, that is an anomaly. The chances of Gold Prices remaining high and a continued rally in the E-mini S&P 500 seem highly unlikely. The problem is deciphering which market will reverse course. Just analyzing the price movement since the beginning of the year might be an indication of which market will peter out first. Since the end of 2015 the E-minis are up approximately 4.75% while Gold Prices are up more than 22.5%. Unless there is new economic turmoil, or the next round in earnings season is very disappointing, it seems unlikely that both Stocks and Gold will continue to rally.
Since June 9th when Gorge Soros was widely known to have created his short stocks, long gold position, the price of stocks has increased slightly while gold prices have soared about $100. While I can speculate that Mr. Soros has made a lot more money on his Gold position than he has lost on his short stock position, for those that are considering both markets now, there must be a concern about buying a commodity that is overbought. Gold has a Relative Strength Index of greater than 75 on a 20-Day basis and greater than 80 on a 9-Day Basis. (These numbers are from early in the evening session on Sunday night.)
Like all commodities, they have a tendency to trade towards the mean. Given Gold’s current level of trading, it is quite possible that in the not too distant future it will begin to correct. The market has been spurred higher by a number of seemingly bullish events. It seems likely that any continued downward movement in the British Pound will help Gold. Should, on the other hand, tensions around Brexit continue to ease and the U.S. Equity markets continue up, the August Gold Price at the time of this article (1373.00) may well seem inflated.
In order to participate in the fall of Gold or a continued rally in Stocks, the implied volatility of both provides a curve that is attractive. The implied volatility of Gold is increasingly lower the farther you get out of the money. Therefore, out-of-the money puts a priced comparatively lower than out-of-the money calls in Gold. The reverse is true in the E-mini S&P. The implied volatility skew enables you to get long for significantly less than it would to get short using out-of-the money options. Just compare some out-of-the money puts to calls in the E-mini which are equidistant from the current trading price and you may be astonished by the difference in price. If any of this is unclear to you, consider a complementary individual webinar to clarify some of the mysteries of options trading.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.