Low volatility is past perfect

Three main subjects in this article: some explanations on historic stock market volatility and how it is derived, an overview of rallies and swoons both in the 21st and the 20th century and finally a discussion on the trend of volatility since the start of the 21st century.

Review of gold price volatility: 1973 till 2017

It’s often heard that gold takes the staircase up, but the elevator down. A gold rally would then consist in a gradual process of relatively small but consistent daily upward moves. The gold cartel (bullion banks and investment banks, backed by the FED) would not allow gold to rally over 2% daily.

Review of gold price volatility

You find the newest article on this subject at: Review of Gold Price Volatility: 1973-2017

It’s often heard that gold takes the staircase up, but the elevator down. A gold rally would then consist in a gradual process of relatively small but consistent daily upward moves. The gold cartel (bullion banks and investment banks, backed by the FED) would not allow gold to rally over 2% daily.

Once ignited, swoons in precious metals are thought to aggravate by forced liquidation of future long positions and the redemption of leveraged products and bullion ETF’s...

All of this is a mixture of facts and myths, causes and consequences, hidden motives and secrecy, misinformation, manipulation and opportunism. While I can do very little about most of those, I will try to clarify some of the facts in order to eliminate a few of the myths.

The volatile NYSE Arca Gold Bugs Index (HUI)

Since a couple of years, precious metal miners are the absolute dogs of the stock market. Every recovery we enjoyed has rolled over, followed by an even deeper trough than the previous bear market bottom. Even before gold peaked in August 2011, miners had been lagging the rising price of the metal.

Credit Suisse Global Investment Returns Yearbook 2014

Credit Suisse Global Investment Returns Yearbook 2014

This popular yearly publication goes in depth on three different questions puzzling many investors. It doesn't provide you with an easy unambiguous answer: there is no such one. Instead the statistical analysis gives you the insight necessary to recognize accepted misconceptions and false evidence. The "Credit Suisse Global Investment Returns Yearbook" 2014 is no longer available on the CS website. You can try the above sequence on a search engine to retrieve a copy on any other site.

Gold price volatility: Real swing still to come...

The below graph shows the price of gold since the start of 2008, gold was about to break above $1000/oz for the first time in history. We all more or less remember what was to follow, but human memory is selective and often narrows down to the more recent events. Apart from the price of gold (in blue using the left axis), a second graph in red (using the right axis) shows an annualized measure of gold price volatility. It wants to tell a story...

Volatility in the gold market

It’s often heard that gold takes the staircase up, but the elevator down. A gold rally would then consist in a gradual process of relatively small but consistent daily upward moves. The gold cartel (bullion banks and investment banks, backed by the FED) would not allow gold to rally over 2% daily.

Once ignited, swoons in precious metals are thought to aggravate by forced liquidation of future long positions and the redemption of leveraged products and bullion ETF’s...

All of this is a mixture of facts and myths, causes and consequences, hidden motives and secrecy, misinformation, manipulation and opportunism. While I can do very little about most of those, I will try to clarify some of the facts in order to eliminate a few of the myths.

Risk mispricing

Derivative positions are accumulating profits… while sweeping on to a catastrophe

"JP Morgan May Be a Trading Accident Waiting To Happen" is what you may like to read on "Jesse’s cross road café blog". JPM’s two billion dollar loss on credit derivatives is making it more and more obvious that the quadrillion derivative positions outstanding are really the accident waiting to happen.

But how can risk models be so flawed that financial collapse is looming behind the corner? Well, just listen to John Butler, author of “The Golden Revolution” as interviewed by Jim Puplava on ‘Financial Sense’, especially the section from 21’30” to 28’30” dealing with risk taking.

Bullish call option spreads

Time value

Speculators familiar with buying options know it too well: the option value erodes over time if the stock stays level. The option value is composed of two components:

·         Intrinsic value (for a call option above strike or a put option below strike)

·         Time value

While the intrinsic value only depends on the option strike and the share price, time value is a different animal. It is larger for a stock that is most likely to end up ‘in the money’. Hence the time premium is higher the more of the following clauses are fulfilled:

·         the stock price is pretty close to the strike (the option is ‘near the money’),

·         the option has some time left for the stock to pass the strike price,

·         the underlying exhibits a high volatility, making it more likely for the stock to bridge the gap to the strike price.

‘Selling options’

It has many names: going short an option, writing an option, selling an option.

An option basicly concerns a tradable contract initiated by the party going short the option. Without any party going short, there can be no options. Going short an option is no equivalent of going short stocks, in which case the shorter needs borrowing the stock to sell straight away. He ‘s counting on it to cover later at a lower price and return the stock to the lender.

Options are created ‘out of thin air’. There are professional parties selling and buying options (both call and put options) for different strike prices and expiry dates. They provide liquidity in option contracts to the market and earn their living mainly from the bid-ask spread. There may not be a bid price for options about to expire worthless. The total number of options written 'out of thin air' is the open interest. The higher the open interest, the more liquid an option contract is likely to be.