The New Gold Bull Market Has Begun

This morning, the Fed stated that it was keeping interest rates the same, but was open to cutting rates in the near future “should it be needed” to aid the slightly wounded economy*. We’re not going to go into more detail on what they said exactly because, frankly, it bores the ever-living sh*t out of us. But you can read that stuff if you’re on the toilet here…

Fed Holds Rates Steady, Hints at Future Cuts if Outlook Doesn’t Improve

Here’s what the stock market liked from the Fed

The Fed just defied Trump’s wishes for a rate cut but signaled that one could come soon

What you do need to know, is that interest rate cuts means gold goes up. Why? Well, in a nutshell, for interest rates to go down the Federal Reserve has to “print money” to buy up treasuries and cause the yield to go down. Prices of bonds/treasuries work in a seesaw motion against the yields they have. (Lesson for another time) Printing money means more money in circulation, which means “theoretically” more inflation, and gold is supposed to be an inflation hedge.  It’s all very boring. Gold went up nearly 3% on the Fed news, but here’s what’s important about gold’s recent price action. Gold spiked up in MULTIPLE currencies, not just the US dollar and has been on a steady move up in all of the big 5 currencies for the last month. The big 5 currencies are the US Dollar, Great Britain Pound, Swiss Franc, Canadian Dollar, and the Japanese Yen. Gold is officially having a bull moment when it moves up in ALL 5 currencies. This metric is used so that it can be established that gold is not just being used as a hedge for one currency while not affecting anybody else in the globe.

Gold prices6.19.19

 

Notice how the Japanese Yen price of gold has gone up the least amount in the last month and it’s still up over 2.5%. When we add up the last month’s price action, 1, along with the 3% spike today in all currencies, 2, then note that the high of today for spot gold in the US dollar is $1,394 and that is the highest level gold has reached in over 5 years (in the US of course) …we’ve got a pretty damn good case that the bull market in gold we’ve been waiting for is here.

There IS a major caveat to this article. We may be a bit premature. We need to see gold break the $1,400 level and stay there to really know that the new bull is here, but our money is on exactly that happening in the next week or 2. Our preferred place to look at the spot price of gold is Kitco.

 

 

 

 

*The main thing hurting the economy at the moment is the trade war. Trump wants the rates cut to theoretically unf*ck problems he caused in the first place.

CBOE’s VIX Tail Risk Hedge Strategy (Advanced Options-Based)

After a massive V-bounce since the Christmas Eve massacre, some of the more advanced readers here may be considering taking some profits off the table or adding some downside hedging. Side note, pardon the fact we haven’t done almost anything on this level as of yet. We’re hoping to get beginners catching up so we can start the “fun” stuff. Anywhoooo, 1-Month returns tends to have a short term reversion, so right now is the perfect time for adding a hedge. The following is a strategy that most have never heard of courtesy of the CBOE. Execution is simple assuming that you have the ability to purchase VIX options. 

CBOE Tail Hedge Strategy

 

1. Review the current level of the VIX. Right now, we’re sitting at 15.74

2. Depending on the VIX level use the following table to figure out how much of your portfolio will be allocated to this hedge.

So in this case, even though its just by a hair, we’d go with the 1% allocation with the VIX between 15-30. For the sake of simplicity, we’re going to assume a portfolio size of $100k. So 1% = $1,000 to be used for the hedge purchase.

3. You will use the forward month of the VIX option table, and find the call option sitting closest to 30 Delta. Currently, that for the forward month of 13 Feb 19, the closest is going to be the $17 strike sitting at 31 Delta.

4. The Feb 13 19 $17 call currently has a mid of .85. So with $1K, that’s going to be $1K/$85 = 11 calls. That’s it. Just let it ride to expiration.

5. If you’re new to VIX options, keep in mind that they have European Style cash settlements. Meaning your ITM calls will settle in cash and can ONLY settle on the date of expiration. The call we bought in the above example only has 8 days left to expiration. If you’re in the money, it will settle as cash. If the market plummets, that cash value will skyrocket.

6. The day after expiration, you will start again from step 1 and review where the VIX is sitting by that time. 

Easy enough, and back tested results are phenomenal (and the best CBOE tested strategy). If you’re interested in reading a bit more on the testing, see the links below.

 

 

 

Further Reading:

Portfolio Hedging using VIX Calls (TheOptionsGuide)

Buying VIX Calls As A Portfolio Hedge (JimFink)

Cboe VIX Tail Hedge Index (VXTH)

Settlement Information for VIX Derivatives

Key Tools for Hedging and Tail Risk Management PDF- CBOE

^^Essential Download for your hedging library.

Options- and Volatility-Based Strategy Benchmark Indexes A few CBOE alternatives