The reason why we see the pretty strong possibility for a bounce in gold gets all the way to the idea of sentiment. We’ve already talked about the CBOE Volatility Index (VIX); there’s a VIX for gold, the CBOE Volatility Index for Gold (GVZ) – there’s also one for oil, by the way, the Volatility Index for Oil (OVX).
However, GVZ works differently than it does on the stock market so you can’t look at it the same way. The Gold VIX is different and, in fact, it has a very positive correlation with gold itself, although not perfect, which, in fact, makes it valuable.
In the video, you’ll see the red and green candles on the Gold VIX’s chart. If you think the VIX is low, the Gold VIX relative to its history is really low. When the sentiment for the volatility for gold gets really low and starts to bounce, like it is right now – we’re just beginning to see the Gold VIX beginning to rise – that’s a really positive sign because that tends to gather quite a bit of momentum.
Just as a for instance here, you can see what I mean in the video with the Gold VIX taking off from what was a strong support level for GVZ back here in August. The black line I point out on the chart corresponds to the SPDR Gold Shares ETF (NYSE:GLD), which is super-imposed on the GVZ chart. You can see that as the GVZ popped, gold takes off like crazy.
Sometimes one will lead the other. For example, in May the GVZ started to take off and it was about a week and a half later that we actually got gold to track with that. That’s more unusual but that will happen from time to time.
There are reasons why that occurs but one of the most important is that the VIX goes up because traders are afraid that stocks are going to crash down. Well, gold tends to crash up. Over the last couple of years, we’ve had a few really good crashes to the downside in gold too but, historically, gold crashes up. That’s what it tends to do. In other words, when the GVZ starts to do what it’s doing right now – it’s kind of bottomed out; we had a couple of little bottoms in December and it’s going to start to emerge – that tends to be a positive sign for gold.
This is a strategy that we’ve deployed in our services like SlingShot Trader for a long time, and in the long run it’s been very productive. When it’s a winner, it tends to be very big, so it’s worth it. Sometimes we’ll probe the market a few times before we get our winner but it’s worth the risk. That’s what we have found in our experience.
So, the bottom line here is we think gold is at a stronger level of support based on sentiment – the Gold VIX in this case – than based on just its price all by itself.
Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.