Gold market volatility, big breakout analogs
Gold Volatility
We just saw another spike in Gold market implied volatility. Spikes in GVZ (the CBOE gold implied volatility index) are often seen around turning points and trend exhaustions; and basically it suggests a period of consolidation — a pause in the gold bull. $Gold - main 2512(GCmain)$
Gold Breakout Analogs
Interestingly this would be consistent with some of the previous major gold breakouts — as Jordan Roy-byrne points out below, past big breakouts have entered into a bit of consolidation and ranging around this stage before moving on to more gains. And the implication being that if it can get through a healthy consolidation then much greater upside could still be on the way.
“Gold All-Time High Breakout Analog Gold has followed the two averages closely. From around here, both averages corrected for 5 months, then surged higher. [this implies] Weaker = $5800 in 16 months, Stronger = $6700 in 10 months.” (source)
Central Bank Buying
Meanwhile, the big driver of this bull market continues to be central bank buying as the US government seemingly does all it can to discourage investors from wanting to invest in US dollars or US debt.
To be more specific, the risk to unfriendly governments of asset freezes makes gold a more attractive reserve asset, while ongoing policy uncertainty, shutdowns, and questions around fiscal sustainability has driven investors increasingly out of bonds and into gold.
Gold Share vs Stocks & Bonds
And yet, as a share of the mainstream global investable assets, gold is still relatively small in the scheme of things: “Over the past 2 years, Gold has moved from 4% to 6% of global investable assets. That’s the highest share since 1986. During the 1980 Gold bubble it peaked at 22% of global investable assets. 20 years later (in 2000) it fell to just 1%.” (source)
From a signal standpoint this number is starting to get elevated, but the all-time historical peak reading of 22% goes to show it’s anyone’s guess as to how far things can go here.
Gold vs Stocks & Bonds
This last chart from the monthly pack provides some interesting perspective on gold vs stocks and bonds from an asset allocation perspective. As I’ve previously noted, it has previously made a lot of sense for investors to skew their defensive sleave into gold vs bonds, but equally the longer arc of history shows how this should be a dynamic as well as strategic decision [as I’ve said before: diversify your diversifiers (some gold, some bonds), and diversify dynamically (sometimes more gold, sometimes more bonds)].
It also goes to show the value of diversification in general as each of the three assets go through differing periods of boom and bust.
And as a final thought, the similarities between the current move (and inflationary shock aspect) to the 1970’s bull runs certainly makes one think…
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