Chart Of The Day - Gold Volatility Signal

Gold volatility index just approached record lows, calm before the storm?

Gold Volatility: The gold volatility index reached a 4-year low last week, and has since then begun ticking higher. Much like the equivalent index for the stock market, (the VIX) this could be one of those classic “calm before the storm” moments.

• Technical note: much like the VIX, the gold volatility index uses option prices (on the popular gold ETF GLD 0.00%↑ ) to calculate implied volatility — which among other things reflects demand for options and realized levels of volatility, and is put together by CBOE.

• One of the axioms of markets is that low volatility is a good predictor of future higher volatility (and vice versa). But another one is that spikes in volatility are typically consistent with exhaustion or the end of a trend, while troughs in volatility are often seen prior to the beginning of a new move.

• When volatility collapses like this it often represents a stalemate or period of indecision — we see this also in the price action for gold (stuck in a tight trading-range), and on the macro as the various cross-currents find a momentary balance (e.g. inflation vs deflation risk, central bank tightening vs recession risk). The trough in volatility also means that options are basically cheaper than usual. So I would say an opportune moment to pay closer attention to the shiny yellow metal.

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