The end of volatility? Gold at a bottom?

Written by Gerardo Del Real
Posted October 27, 2016 at 8:06PM

I'm in New Orleans today to take part in the New Orleans Investment Conference. I’ll be co-hosting a workshop with colleague, friend, and founder of Outsider Club Nick Hodge.

As I walk around and observe the early crowd, two things stand out.

There’s a cautiousness about the latest pullback in the gold price. The kind of cautiousness that gets shaken out of great positions at the first sign of a further drop in the price of gold. A drop that I believe we will see within these next two months.

The early crowd at a session about investing in real estate as a hedge against uncertain monetary policy is a good indicator that people are starting to pay attention to the possibility that all is not well behind the curtain.

Stocks are near all-time highs once again, the dollar is surging higher as well, volatility is non-existent, and gold appears to be bottoming.

So is volatility a thing of the past and is it time to go all in on gold? No.

The failure of the Fed to increase rates in September had the effect I thought it would have, it made the Fed predictable.

Markets have raised the implied probability of Fed action in December to almost 75%. Despite the expectation that the Fed will raise in December and dollar highs that we haven't seen in over nine months, stocks continue to flirt with all-time highs.

This is a trend that will continue as central banks look for creative ways to allocate capital in assets that have a chance of providing a positive return.

The result of central bank interference and a market that knows exactly what to expect from the Fed is a low in volatility that hasn't been seen in nearly two years.

Pick an asset class. Metals, stocks, bonds; it doesn’t matter. They’re trading as if we lived in a world where growth expectations were being met, wealth inequality was non-existent, and our political leaders were a who’s who of best possible outcome.

volatility expectations plummeting

A recent Bloomberg article showed Bank of America Merrill Lynch’s GFSI Market Risk Index, a measure of future price swings implied by options trading on global equities, interest rates, currencies, and commodities, has fallen for five straight days, the longest such streak since May. It now sits at the lowest level since December 2014.

Treasuries? Same thing. The Merrill Lynch Option Volatility Estimate, a gauge of expected price swings in the government-issued securities, is at a level it hasn’t seen in two years.

treasury volatility tumbles

In a world where central banks artificially prop up assets and manipulate volatility, how will gold react in the near term?

A few weeks back, days before the latest drop in the gold price, I wrote that if gold can’t break out it will break down. Corrections rarely happen in isolation.

Gold tends to go up in the final quarter of the year in India due to Hindu festivals such as Diwali, Dussehra, and the start of the wedding season.

This year however, I see the combination of a Fed rate hike, a stock market nearing all-time highs, and a stronger dollar that will put too much pressure on the gold price.

You’ve heard me say it, but it’s important so I’ll say it again: The opportunity this pullback is presenting is a contrarian’s dream.

The only reason to not take advantage of the pullback to add the best names, at attractive entry points, is if you don’t believe we are in the early stages of a gold bull market.

If that’s the case, you will be buying those same names at much higher prices. The gold bull market will happen with or without you.

The lack of volatility in the markets, stock market highs, and stronger dollar are all partly due to central bank interference. What happens when people realize the central banks lose control? Where does all the capital that will rush out of the treasury market go?

These are the main trends to get right in 2017: Higher U.S. stock market, volatility, higher gold, and the beginning of a spectacular year in the best juniors.

One of my recent picks is up 63% in just over two months. This during the pullback in the price of gold, yet despite doing well, over half of the portfolio is now back under the buy-under prices.

In the words of Rick Rule, “you’re either a contrarian or a victim.”

In order to buy low and sell high, it’s important to get the buy low part of that equation correct. Sounds easy, right?

On a personal note. Go Cubs Go!

fly the w

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

*Follow Outsider Club on Facebook and Twitter.

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