Go long on precious metals
Michigan
Posts: 4,942 ✭
American traders refer to the Chicago Board of Options Exchange Volatility Index (the Cboe's VIX) as the fear gauge of the US markets. The CBOE looks at the premiums of outstanding puts and calls on the S&P 500 index to derive a weighted average of implied volatility.
Stripped of mathematical jugglery, the concept is simple. Premiums are influenced by expectations of volatility (the IV) during the life of the option.
If IV is high with respect to actual historic volatility, the market is jittery and vice-versa.
In practice, the VIX has been negatively correlated to actual index movements since 1986 through dozens of key market reversals (VIX was introduced in 1993 and recalculated in 2002 and back-calculated till 1986). When prices are near the bottom, VIX tends to be high due to panic. It is usually low due to complacency when prices are topping out.
What's scary is that the VIX is close to historic lows now. If history is repeated, a big crash is due in the US stock market. US bond market behaviour (yields are rising after a recent Fed hike and expected to rise further) and forex behaviour (the dollar has weakened despite the aforementioned hike) reinforces this expectation. It may be only a matter of time before US stock markets follow the plunging dollar.
This was a partial explanation for the crash across emerging markets. Another reason was hedge fund selloffs in the metals markets and in metal stocks.
This may have been caused by a mixture of profit-taking and nervousness. A third reason was margin calls once prices dipped below key levels. A fourth in India was the announcement of new norms that could affect FII tax incidence.
As in most places, the selloff in India hit metals especially hard. Speculators drove up metal prices in February on higher projections of Chinese consumption. They've sold off now that it appears those estimates were over-optimistic. Most metal stocks are down by near 20 per cent in the last week.
Has the reaction been exaggerated enough to make base metals (and metal-producing stocks) worth buying on the rebound? Opinions are sharply divided. Some highly respected fund houses expect further deflation of the base metal bubble. Other, equally-respected houses opine that demand driven by India and China will ultimately pull prices up from current levels.
You could toss a coin. Further short-term volatility is guaranteed and metal prices could move in either direction given the lack of consensus. You may find another way to resolve this argument though and one that attempts to exploit base metal volatility with less risk.
Ignore base metals and go long on precious metals. There is fear apparent across global currency markets and an expectation that crude prices will stay high driving up global inflation.
That fear is the perfect recipe for gold bugs to prosper. It has already pushed precious metals to 25-year tops. Dips on Monday and Tuesday were followed by renewed buying on Wednesday.
If base metals recover and the asset bubble continues, gold and silver will continue to gain ground. If base metals collapse again and inflation fears get stronger, precious metals will again gain ground.
If the US stock market collapses, or the dollar drops, precious metals will once more gain ground. This bull run would halt only if inflation somehow cooled off and traders regained their equilibrium. That's unlikely at the moment.
Stripped of mathematical jugglery, the concept is simple. Premiums are influenced by expectations of volatility (the IV) during the life of the option.
If IV is high with respect to actual historic volatility, the market is jittery and vice-versa.
In practice, the VIX has been negatively correlated to actual index movements since 1986 through dozens of key market reversals (VIX was introduced in 1993 and recalculated in 2002 and back-calculated till 1986). When prices are near the bottom, VIX tends to be high due to panic. It is usually low due to complacency when prices are topping out.
What's scary is that the VIX is close to historic lows now. If history is repeated, a big crash is due in the US stock market. US bond market behaviour (yields are rising after a recent Fed hike and expected to rise further) and forex behaviour (the dollar has weakened despite the aforementioned hike) reinforces this expectation. It may be only a matter of time before US stock markets follow the plunging dollar.
This was a partial explanation for the crash across emerging markets. Another reason was hedge fund selloffs in the metals markets and in metal stocks.
This may have been caused by a mixture of profit-taking and nervousness. A third reason was margin calls once prices dipped below key levels. A fourth in India was the announcement of new norms that could affect FII tax incidence.
As in most places, the selloff in India hit metals especially hard. Speculators drove up metal prices in February on higher projections of Chinese consumption. They've sold off now that it appears those estimates were over-optimistic. Most metal stocks are down by near 20 per cent in the last week.
Has the reaction been exaggerated enough to make base metals (and metal-producing stocks) worth buying on the rebound? Opinions are sharply divided. Some highly respected fund houses expect further deflation of the base metal bubble. Other, equally-respected houses opine that demand driven by India and China will ultimately pull prices up from current levels.
You could toss a coin. Further short-term volatility is guaranteed and metal prices could move in either direction given the lack of consensus. You may find another way to resolve this argument though and one that attempts to exploit base metal volatility with less risk.
Ignore base metals and go long on precious metals. There is fear apparent across global currency markets and an expectation that crude prices will stay high driving up global inflation.
That fear is the perfect recipe for gold bugs to prosper. It has already pushed precious metals to 25-year tops. Dips on Monday and Tuesday were followed by renewed buying on Wednesday.
If base metals recover and the asset bubble continues, gold and silver will continue to gain ground. If base metals collapse again and inflation fears get stronger, precious metals will again gain ground.
If the US stock market collapses, or the dollar drops, precious metals will once more gain ground. This bull run would halt only if inflation somehow cooled off and traders regained their equilibrium. That's unlikely at the moment.
0
Comments
I believe there is still a MAJOR correction looming in stocks to remove some of the excess that was not handled during the 2001-2002 period. But the markets have a way of going on far longer than anyone thought possible. A significant correction is long overdue but with all the liquidity the world govt's are putting out, they might be able to ride the inflation beast quite a bit longer to keep the markets buoyed. But any gains in the markets will likely be more than offset by inflationary losses. The 1982-2001 bull market is still the only one in the 20th century that did not take a devastating correction following the peak. Again, thank the world liquidity pump
(via housing) for pushing that back several years.
roadrunner
If you will guarantee me a profit, I will use all my savings and hock everything I own and buy precious metals.
All one can do is to try and go with the general trend. The fact that commodity buyers are still a huge minority does give some comfort that there is plenty of room left.
roadrunner
More money has been lost due to people avoiding potential falls, than in actual market falls.
<< <i>My 1923 German coin inflationary money denominated 500 Million Marks is a constant reminder for me of what can happen to fiat money. You must always have a portion of your assets in physical holdings like gold and platinum. Silver is okay too but tends to be bulky.
I found one of those in a wall last week!I did a search and found out about the inflationary german money interesting.
This prediction is worth just as much as you paid for it.
gold was and is a good strategy due to our govt's spending.
i do not trust the dollar.
picking individual stocks takes a lot of effort to avoid bad ones.
i do not trust corporate executives to take care of stockholders.
etc..
when there is more transparency in accounting, watch the money
roll back into stocks.
until then!
It is spiking up because of the recent down days. Any sell indication would have gotten a person out several times before today. Is the original poster saying we should have sold ten days ago when the VIX was still low? Wouldn't even a stronger sell have been sounded late last year? Where was the alarm bell then? Isn't a bit late to be selling now, when the short term VIX is spiking up?
In any case, wtf does VIX have to do with going long precious metals? The link is tenuous at best. A more relevant analysis would look at put and call volume and volatility of gold and silver futures options.
For long term investors here is a 15-year chart of VIX
Yes, a high volatility reading is a sign of a bottom and a low one a sign of a top. However, any trading on this alone would have missed some good gains over the past 15 years. I will let the readers interpret the current charts for themselves.
Good stuff!!!!
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TD
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heh heh heh
<< <i>For charts, I have found this one not only self explanatory, but also infallible.
honest, neat, to the point
Go BIG or GO HOME. ©Bill
lots of stocks and investment media all the time. Become familiar with dozens of specific investments
and then only buy those which are at historic lows for no discernable reason. This isn't to say that it's
too late to buy a hot item, just that there has to be fundamental reasons that it can and should go
much higher. Such investments should be considered risky and make up a small percentage of one's
portfolio. Buy on dips and don't "average down" unless there are improving fundamentals.
Most investors should keep a portion of their wealth in precious metals and gold. Gold is the closest
thing there is to currency insurance so owning at least a little is important. But there is no reason to
keep all of one's insurance just in gold. Real estate and other commodities perform the same function
to a lesser degree and those who have missed the increase in gold can put their money in other sim-
ilar instruments until such time as it is possible to swap into gold. Some of the metals have not been
involved in the increases of late and are likely to catch up at some point. Tin and nickel come to mind.
Nickel is needed to make stainless steel which is increasingly popular and tin has always been a relat-
ively hard to find metal with little demand. Aluminum is only pennies above it's old all time high though
it is an extremely abundant metal it requires huge amounts of energy to refine it.
Just swapping back and forth between silver and gold can provide huge increases in a stockpile with
no increase in investment. This ratio is at a mid term low at the current time and if you guess the di-
rection correctly large profits are possible. The same bets can be made with financial instruments like
saddles and futures but one loses the "insurance" value of the metal.
Just remember that the crowd is always wrong. They are wrong by definition. If you get in while the
crowd is getting in then you will lose money. I do not believe the crowd is really into gold yet. the
price would be far higher if the conventional wisdom were to have a percentage of one's wealth in the
metal.
(Just think of city streets clogged with a hundred thousand horses each generating 15 lbs of manure every day...)
<< <i>Swapping between silver and gold is a taxable transaction. Swapping between gold and gold or silver and silver isn't. >>
Stickin with Goloid and Argentum here, boss.
Didn't wanna get me no trade
Never want to be like papa
Working for the boss every night and day
--"Happy", by the Rolling Stones (1972)
By the way, with a moniker of "Michigan," why are you wearing Green Bay's colors?????
TD
found at the top of a particular market. Also the
near unanimous opinion that this is THE investment
of the century is a bit troublesome. Be carful out there folks
the sharks are beginning to circle. Finally, never underestimate
the ability of central governments to manipulates the rare metals
market to their advantage.
Camelot
investment strategy exactly.
Camelot
<< <i>As for the cgart, It seems to mirror my stock
investment strategy exactly.
When your in a boat that is sinking which would you prefer
A: Life Raft
B: A Certificate for a Life Raft
"The silver is mine and the gold is mine,' declares the LORD GOD Almighty."
null
NSDR - Life Member
SSDC - Life Member
ANA - Pay As I Go Member
<< <i>Go long on precious metals >>
You mean tomorrow right?
My posts viewed
since 8/1/6
<< <i>
LOL...indeed
where are the cheerleaders now???
P * O * P
Go BIG or GO HOME. ©Bill
Russ, NCNE
Tom D.
Whoever gave up those 2 MS70 1993 $50 Gold Proofs in the GAME ?
Inspite of the drop in METAL, I just gained 14 places and five grand off of two of them. Thanks to whoever dumped them when they hit $17,500 during the UPSWING.
They are at 20 grand now.
I think some people missed even HRH's SUBTLE HINT on the boards to GO LONG on the yellow metal, but there is a difference between bullion and proofs or Gold bars and ingots of Moffat, or Kellog or any of the private minting companies of the early years. You'll pay a premium for both, but one will not be as controlled by the commodities market as the other.
Remember:
Rarity and Condition Rarity will rarely see the effects of the market swings and any change is usually upward.