Source: Michael J. Ballanger for Streetwise Reports 05/31/2018
Precious metals expert Michael Ballanger dissects his volatility trades.
One week ago today, I made the following commentary:
“Finally, I am officially revisiting the “volatility trade” (VIX: CBOE Volatililty Index) but unlike February where I used the UVXY (ProShares Trust Ultra VIX Short) as my proxy for the increase in volatility, I am using the TVIX (VelocityShares Daily 2X VIX ST ETN) because it is a double leverage ETF for the VIX but has better leverage than the UVXY. UVXY used to be a triple-leverage play on volatility but the slippage due to its dependence on futures became too difficult to navigate and they cut the leverage from 3:1 to 2:1. I had a 250% gain on this in February but gave back 9.84% in April. I am long 50% of the TVIX position from yesterday at $4.95 and am using the opening this morning to add another 25% in the $5.25 range. I will again use a 10% stop-loss but since the 52-week low is $4.60, that will be the exit level. Upside target will be $8.00 remembering of course that the 52-week high was $26.56.
The month of May is rapidly coming to a close, which starts what is historically the worst six months of the year. With the situations in Turkey and Italy worsening, with the North Korean summit in question, central banks engaged in “quantitative tightening,” rising oil prices, and the possibility that the China-U.S. trade talks go south, markets are going to be in peril as summer illiquidity arrives. For this reason, gold “should” be the go-to asset, but I am banking on volatility rather than gold as the preferred method of riding the correction.”
In the Monday overnight session, the words “panic,” “contagion,” and “implosion” were being bandied about while the S&P futures were off sharply when I arrived at the gym yesterday at 7:00 a.m. Sure enough, gold and silver did not respond to the developing crisis in Europe because U.S. dollar strength is significantly more important to gold demand than Italy and Spain vaporizing in front of our very eyes.
Monetary panic doesn’t throw the slightest of bids into the precious metals any more because they can simply buy the VIX as a hedge because gambling on a piece of financially engineered paper like the VIX ETFs is infinitely more sensible than owning a monetary metal with 5,000 years of well-earned legacy as a preserver of wealth. The huge sell-off in gold initially in response to the currency swing was reversed in the Tuesday afternoon session and what was a $12.30 loss became a slight positive by 2:00 p.m. The chart below of the VIX index shows a gap on January 29, which precluded the moonshot to $49.21 a week later. Since I have been accumulating the TVIX under $5.00 all last week and on Monday, Tuesday’s 38.2% move in the VIX Index was accompanied by a 25.5% move in the TVIX. While our $8.00 target seems a tad conservative given the move in February to $26.56, I have grown to appreciate base hits and doubles over home runs lately, which might be a function of my age or pondering last year’s capital gains/losses report completed last month.
Wednesday’s 38-point rebound in the S&P 500 caused the VIX to give back 13.69% and the TVIX to give back 9.1%, but I continue to gather in “VOL” on dips because those two gaps in January and againTuesday day may be indicative of a violent return of the type of action that allows for a 250% return in eight days as we experienced back in very early February. Furthermore, to have a 32-point decline followed the very next day with a 35-point rebound followed by today’s 18-point drop is classic volatility, and that is not the type of stock market behavior that instills investor confidence.
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The next big story and one which is being underplayed by the financial media is the current debacle called Deutsche Bank (DB:US), which this morning took out the lows of September 2016 and is now resembling a company in severe duress. I did a quick scan of headlines for DB over the past five years and notwithstanding that DB holds the largest derivatives book on the globe, this bank has been infested with numerous problems over the last few years. Mortgage fraud, gold manipulation, Libor fraud and now massive layoffs would imply that all is not well with this behemoth that truly is the ultimate in “Too Big to Fail” financial institutions. The leverage they carry representing sovereign debt positions would create a counterparty contagion the likes of which would make the 2007–2008 subprime crisis look like May Day picnic. The fact that they are the one bullion bank most responsible for the overt and unsanctioned shenanigans in gold and silver makes their current woes doubly satisfying for metals buffs like us, but you must realize that having Deutsche Bank implode would send shock waves through all of our markets triggering gargantuan liquidity squeezes, which means that long positions in everything would be thrown overboard in order to reduce the leverage that is keeping these markets afloat. This is again why I see the volatility trade as the best method of protecting one’s wealth given the vacuous moves by the Trump administration to impose tariffs on Mexico, Canada and the Eurozone.
Interestingly, the only way to judge the collective risk appetite of the junior resource sector is to glance (if you can stomach it) at a chart of the TSX Venture Exchange (CDNX) which, after reclaiming the 800-level back in April, has once again succumbed to seasonal weakness and is threatening to take out the April low around 754. Every year, I always make a vow to reduce my exposure to zero by the end of March with a view to buying back my …read more
From:: The Gold Report