Macro Wrap – $GLD, Which Way Does the Precious Metal Break?

by Enis February 7, 2013 7:53 am • Commentary

Part of my morning routine is to go through all the major asset classes globally, and get a sense for inflection points in the market.  Gold seems to be at such an inflection point.

Here is the 2 year chart on GLD:

GLD 2 year chart, Courtesy of Bloomberg
GLD 2 year chart, Courtesy of Bloomberg

The metal is currently wedged between the declining 50 day ma (in pink), and the flat-lining 200 day ma (in black).  After the strong run-up in 2011, gold has basically been much ado about nothing, trading between 150 and 175 in the ensuing period.  Given the recent tight consolidation between the moving averages, it does look like a break up to 170 or a break down to 150 is imminent.  Unfortunately, I see little evidence to indicate which way that break will be.  Even when I look at momentum charts or volume-based studies, nothing stands out to me to indicate whether there are greater odds of a move up to 170, or a move lower to 150.

So I’m not comfortable with a pure directional trade.  What peaked my interest though was when I looked at implied volatility pricing on GLD options.  The 1 year chart of 30 day implied volatility (in red) vs. 30 day realized volatility (in blue) in GLD:

1 year chart of 30 day implied vol vs. 30 day realized vol, Courtesy of LiveVolPro
1 year chart of 30 day implied vol vs. 30 day realized vol, Courtesy of LiveVolPro


Implied volatility is at its lowest level in the past year (and actually the lowest level in the past several years).  There is good reason for that, given that realized volatility is near 1 year lows as well.

However, this is where the wedging action becomes important.  If gold is near an inflection point, options prices are currently too cheap, since they’re priced off of a range period that I think is close to ending.  I see a potential trade here to simply buy volatility on GLD, with no directional bias, benefitting as long as GLD does break out in either direction in the next month.  No trade yet, but on my radar.

Markets overnight:

  • Asian equity markets were mixed, with no markets moving more than 1%.
  • European markets opened flat, and are now about 0.5% higher.  Both the Bank of England and the ECB signaled no change to current policy.  SPX futures are up 0.1%.
  • Dollar a touch lower, Treasuries lower, and commodities higher.
  • Jobless claims, Nonfarm productivity, and unit labor costs data at 8:30 am EST