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Volatility is extremely low: What you need to know about gold

Jeff BishopJeff Bishop ·

The market is resilient, and it feels like we haven’t had a real sell-off in a long time. With the Dow, Nasdaq and S&P 500 near all-time highs, volatility has been extremely low. Investors and traders don’t seem fearful of a market drop, and they’re shorting volatility with ETFs and buying less S&P 500 put options; causing the VIX to remain below $10. For now, that’s the right play. There’s no clear reason for a correction yet, especially with the developments in the tax bill. That in mind, the VIX could remain low until there’s some sort of negative catalyst.

Volatility is extremely low

Check out the email I sent out to our community of traders:

TSP volatility email

Low interest rates and volatility, coupled with a bunch of cash on the sidelines, pushed prices in multiple asset classes higher. And the move doesn’t look like it’s running out of steam just yet.

Looking at the CBOE Volatility Index (VIX), you can clearly see it’s been trending lower. Moreover, it’s near the low end of the range.


One of the largest bets over the past few years was short VIX. Since you can’t short the VIX, the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) is one bet that’s been great as a short volatility play. One look at the chart explains how well that has worked this year.


That’s right, XIV hasn’t really sold off since early 2016 and looks to continue higher. It’s been “free lunch” for some traders for a while, but that game could eventually come to an end.

Now, we already know what low volatility means for the equity market…it just drives the market higher. However, what does this do to asset classes like gold?

Low volatility is trickling down to gold

The extremely low volatility in the equity market has been trickling down to gold. When investors and traders aren’t fearful of a sell off, it tends to cause less trading in gold, often considered a safe haven asset. In turn, this lowers the volatility of gold prices.

Check out the CBOE/CME Index of gold volatility, this pattern looks pretty similar to the VIX.

gold volatility

Additionally, the cryptocurrency craze is getting larger, which also affected gold prices and volatility. No one seems to care about the yellow precious metal. Rather, they want to ride the digital currency wave, with the hopes of getting rich overnight.

If you follow my trading style, you probably know that I like to buy assets that the investors are getting out of. Although I’m not currently long any gold, I’m holding physical gold and would like to buy more. I’ll take the asset that’s got a 5,000-year history over one that’s just in its early stages. If there actually is a selloff, my physical gold could produce some attractive returns.

The bottom line: I think if, and when, volatility catches a bounce, there could be a multitude of trades in various gold-related ETFs and ETNs, such as the SPDR Gold Trust (GLD), VanEck Vectors Gold Miners ETF (GDX) and Direxion Daily Gold Miners Bull 3X Shares (NUGT). Again, I’ll be patiently waiting to get into these and wait for my charts to set up.


  Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, using stocks, options and leveraged ETFs.

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