Signal du Jour - short vol in GLD

Will gold cool down a little?

As expected, a polite but firm Powell reminded a crowd of journalists yesterday that he is in no rush to act on the monetary-policy front, acknowledging the deep structural changes under way at the global level—repercussions that are still difficult to forecast precisely. The market decided that was reason enough to move on with its life: equities are now only a few percentage points away from turning positive on the year, while U.S. rates remain fairly flat.

Yet we will continue ignoring equities at these levels of implied volatility and instead turn again to commodities. After a rocky—but ultimately profitable—position in USO last week, today we shift our attention to GLD and, hopefully, some shiny returns down the line.

Let us take a look.

The context

Gold has had quite the rush since the beginning of the year. It was supposed to be a year where it would lose some of its appeal as investors were anticipating a splurge of deals and stellar performance from riskier asset classes. Instead, while most of the losses have been recouped, gold is still firmly at its all-time high.

Up a solid 25% year to date and no clear sign that it will head lower anytime soon. Some consider that as long as the risk for higher inflation will not be dissipated, gold still has some legs, while others are now convinced that the rush to safety has reached its peak and the metal should head a little lower.

We have no opinion on direction, as usual. But what is pretty apparent is that the realized volatility—as well as its semi components—has been gradually going up, particularly over the last few days.

Realized volatility is well above the level observed over a year.

With a realized flirting with 30, we are now well above the highest levels observed over the last year. More interestingly, the divergence between the two semi-variance components: is this a sign that things are about to calm down a bit? Potentially.

Upside and downside realized volatility show a pretty steep divergence at the moment.

This is again not a perfect indicator, but this thing is quite mean-reverting and recent peaks tend to coincide with moments where realized volatility itself reverts back to more sustainable levels.

This is also in line with our more traditional forecasts for realized volatility in GLD.

Do not expect volatility to drastically cool off - somewhere between 25 and 30, this should be the levels for the next 30 days.

We do not necessarily expect a massive drop from the current levels and in fact, as long as we will be in a market dominated by headlines, it is likely that gold will keep reacting quite strongly, keeping realized volatility pretty high. But any meaningful continuation above where we currently sit seems unlikely.

In short, a lot of macro forces are driving the metal prices right now and with this, we can expect that the implied volatility in options may be a little too elevated to reflect the high level of uncertainty. Let’s have a look.