Will Gold’s Friday Break Thru Hold?

The Market Gage - Gold is Elemental

Since we described the bond and treasury market in Friday’s Market Gage, I thought it would be appropriate to describe how the CBOE VIX (volatility index) works and why we follow this index so closely.

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.

The VIX Index is also known as the “FEAR GAGE”.

Trying to keep it simple the VIX is simply a measure of fear and complacency in the markets based on the premiums investors are willing to pay for protection from market corrections.

The premiums in options can be defined as the risk. The greater the risk the higher the premiums, and the lower the risk the lower the premiums. If buyers are more aggressive, premiums rise, if sellers are more aggressive, premiums fall. The VIX value is based on millions of transactions by traders from around the globe. Buyers and sellers move the option prices.

The VIX Index takes a weighted average of all these options in the S&P 500 index and calculates a single number called the VIX.

I’ll spare you the algebraic equation on how it’s calculated. The important point is just to understand that a higher VIX is indicative that investors are increasingly worried about a market downdraft; the lower the VIX, the more comfortable – or at extremes we might say complacent – the investors are that there is nothing to worry about.

Ok, your thinking, “I trade gold. Why should I care about the VIX?” Well, every trader dreams of volatility. Volatility creates opportunities and excitement in the market. We’ve been trading in a twenty dollar range forever it seems, but gold option volatility is expected to rise as we finally broke out of our doldrums on Friday.

In my opinion, this break out was all based on the odds of both the House and the Senate agreeing on a tax plan. Stops were triggered after we broke thru the $1,290 level on Friday. I indicated in past editions of The Market Gage that I believed the patient longs would eventually see their pay day. Only time will tell if they have hit a single or a grand slam. So now we wait as both houses are now off for the Thanksgiving recess and hope to get back to work on the 27th of November.

As news leaks out between now and when they return, I believe that all markets will continue to be a little concerned about the outcome. So we will be watching the Dow and the VIX closely to see if there are any nerves to be unwound.

And by the way, for those of you who have yet to understand the unique value Gold brings to your portfolio diversification, the VIX is skirting with record lows, which means that since it has begun trading, investors and financial advisors have never been less worried about a correction in the market or more complacent than they are today.

That’s music to my ears – and I’ve heard this song before. Looks like a fabulous
setup for Gold in the months ahead.

Have a wonderful Monday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisers with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.