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.

AUD/JPY – The Boat We Missed

We published a thesis yesterday for being short Australian dollars “AUD” and Long Swiss Franc “CHF”. In conclusion, we wrote: While we started drilling down on this idea because of our bearish view on AUD, in conclusion we have to admit that we like this trade more because of the CHF component.

Despite our gargantuan temptation to want to focus on CHF, we did our best to resist it and focused instead on the bearish AUD idea chain. We will be sure to publish our report on a long CHF idea in the coming days. This article, however, is a continuation of the short AUD idea chain. Our focus here is the Japanese yen “JPY” , another safe haven currency.

For those of you who haven’t followed along, please check out our previous posts for a quick primer on this idea chain:

  1. The Aussie Dollar, In A Checkmate!
  2. Australian Dollar – A Bearish Outlook But A Bullish Set-Up
  3. Rigel’s Currency Corner – Short AUD/CHF

Our Thesis

Most of what we laid out yesterday applies to the AUD/JPY pair as well. Salient points below:

  1. Protection is cheap:
  2. In times of crises, during a risk-off mode, the US dollar, the Japanese Yen, and the Swiss Franc are seen as currency safe-havens.
  3. The Bank of Japan’s (BOJ) balance sheet size to GDP ratio is at 90%, currency intervention from the BOJ is a low risk.
  4. China devaluation risks have disappeared only from the minds of traders.

Please click here to read the entire article.

Short AUD/CHF

Our Thesis

  • We have been voicing our views on the Australian dollar “AUD” for the last couple of months. For a primer, please check out our previous posts: The Aussie Dollar, In A Checkmate! and Australian Dollar – A Bearish Outlook But A Bullish Set-Up.
  • Protection is cheap:
    • Despite the most heightened uncertainties surrounding China, North Korea, Middle-East, Russia, Turkey, Trump, etc. protection is cheap.
    • Global markets are not prepared for a risk-off scenario.
  • In times of crises, during a risk-off mode, the US dollar, the Japanese Yen and the Swiss Franc are seen as currency safe-havens.
    • “Ranaldo and Söderlind (2010) showed that the yen and Swiss franc appreciated in a systematic way when risk peaked… De Bock and de Carvalho Filho (2013) found strong evidence for the same conclusion – returns on the yen and Swiss franc outperformed those of all other currencies when risk spiked.” – Adrian Jäggi, Martin Schlegel, Attilio Zanetti.
  • The Swiss National Bank’s (SNB) balance sheet size to GDP ratio is nearly 100%, higher than BOJ’s which is at 90% of Japan’s GDP.
    • We will not dare assume that the probability of a currency intervention by the SNB is zero but we do think that the bar for a new round of currency intervention is high considering SNB’s obese balance sheet.
  • China devaluation risks have disappeared only from the minds of traders.
    • Being short the Australian dollar against the Swiss Franc, in our view, is the best way to capture this risk premium.

Please click here to read the entire article.