The CBOE Gold Volatility Index (GVZ) is similar to the stock market Volatility Index (VIX) in that it measures the market’s expectation for volatility over the next 30 days. We often refer to the VIX as the stock market’s “fear gauge.” And we use it as a contrarian indicator.
For example, when the VIX is high and investors are fearful, that’s often a good time to buy stocks. When the VIX is low and investors are complacent, it’s often a good time for caution.
The GVZ is also a good tool for measuring fear and complacency. And it can provide excellent timing signals on when to buy or sell gold stocks.
But traders have to look at it differently than they look at the VIX. Let me explain…
In the stock market, volatility increases as investors grow fearful and sell stocks. So, the VIX tends to go up as stock prices fall. They move in opposite directions.
In the gold market, though, the GVZ and gold stocks tend to move together. In other words, gold stocks rally as GVZ moves higher. Gold stocks fall when GVZ falls.
It all makes perfect sense when you think about it.
Gold and gold stocks are often seen as a hedge against bad times. So, as investors grow more fearful, they tend to buy into the gold sector. The “fear gauge” and the gold sector move higher.
When investors are complacent and don’t see a need to hedge against bad times, GVZ and the gold sector move lower.
And just like the VIX can trigger buy and sell signals for the broad stock market when it moves outside of its Bollinger Bands, the GVZ triggers the same sort of signals with gold stocks.
Take a look at this chart of GVZ plotted along with its Bollinger Bands…
Bollinger Bands help identify the most probable move for a stock or an index. It’s uncommon for a chart to move much outside of its Bollinger Bands. So, when it does happen, it’s an extreme move – and it’s a move that will likely reverse.
The red circles on the chart show each time over the past year that GVZ closed above its upper Bollinger Band. This indicates extreme fear among investors, and an overbought condition for the gold sector.
The blue circles indicate each time GVZ closed below its Bollinger Bands. That shows extreme complacency and an oversold condition for the gold sector.
Now look at how the VanEck Vectors Gold Miners Fund (GDX) performed after each of those signals…
Three of the past four sell signals marked almost the exact top of the gold stock rallies. All three of the past year’s buy signals occurred near the exact low for GDX.
On Friday, GVZ closed below its lower Bollinger Band. Investors are complacent. They’re not worried and they see little or no reason to be buying gold and gold stocks. The three previous times we’ve seen this condition this year, gold stocks were sharply higher 30-60 days later.
We may not have hit the exact bottom of this particular gold stock decline. But I’ll bet that we’re close enough to a bottom that the gold sector will be higher two months from now.
Aggressive traders should consider adding some gold stock exposure on any further weakness.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, a subscriber writes in with what they’ve learned about overleveraging…
Like many others I have followed your advice for a few years during and after Stansberry & Associates and very much appreciate your guidance. One thing I have learned, only too slowly, is how to manage risk in trading options. For example, I sold a few ABX put options per your Delta Direct suggestions (and I thought it was not a huge number of options which I sold). Then, yesterday, I was notified by my brokerage firm that a couple of my put options were assigned/exercised.
I was surprised that this would happen (being two weeks ahead of option expiration date) and I also realized that the total number of put options I sold would result in buying many more shares than I would normally be willing to purchase. In other words, I think I have “over-leveraged” my options trades. I remember your advice several times in the past against over-leveraging. This time it took real dollars to make it sink in.
So from now on, I will be much more careful in choosing the number of put options to sell, or options to buy. Thank you for your efforts and guidance.
– Tong L.
Do you have a past trading experience or lesson that you’d like to share? Or any comments or questions about trading options? Send them all right here.