The Ascent of Aurum – Long Gold

Exactly a year ago, in May-2016, we published our analysis of Gold demand trends provided by the World Gold Council. We wrote:

Gold price charts and physical gold demand trends offer a dichotomous view on the future of gold price. On the one hand, the extremely lose [sic] monetary policies of the world, and the phenomenal 1st quarter performance of gold relative to every other major asset in the world makes for a very compelling bullish case and on the other hand the physical gold demand trends paint a very bleak, if not scary, picture.

The World Gold Council recently published their 1st quarter 2017 report on gold trends but this time our analysis of that report leaves us with anything but a bearish outlook on gold. We have turned massively bullish on gold and we will outline our reasons below.

Our thesis rests on three reasons:

  1. Declining global mine production in years to come — a result of past, massive, haircuts to capex by some of the largest gold miners around the world. Gold miners’ Capex has declined 65% from 2012 to 2016.
  2. Gold is a safe haven asset and according to world Gold Council’s most recent report on demand trends, current uncertainties in China and Europe are driving these flows.
  3. Technical analysis of gold price chart reveals a strong bullish set-up at a time when this trade is far from being crowded.

Please click here to read the entire article.

Long Vega of Vega – an update on the breadth of the US stock market

Breadth of the US stock market (number of new highs minus number of new lows) is pointing to continued weakness in the markets.

Over the last five years, on average, the price of the S&P 500 index has been about 20% above its long term mean. This dynamic broke down in June-2015 and it coincided with a text-book-correction: dropped 20%, tested support and bounced off. Since then, however, it has struggled to go over 16% of its long term mean. The last two times it tried to get above 16% (Feb-2017) and (May-2017) it turned back down. The market has lost its upside momentum.

Every time the ratio of 1 month S&P 500 volatility to 3 month S&P 500 volatility spikes, it, almost always, is accompanied/followed by a decline in S&P 500. Why would this time be any different?

When an asset that has been appreciating for the last 8 years turns lower even by small amounts, the introduction of negative daily returns to its return distribution tends to increase the volatility of that asset by a meaningful amount. While we are long volatility we think a better trade structure might be to focus on acquiring long exposure to volatility of volatility of the US stock market. In our view, one of the best trades for the next 12 months is to be long Vega of Vega. We will continue to develop this idea and post our thoughts on an ongoing basis.

Please click here to read the entire article.