Time To Hedge

Elmwood Data's picture


Since the summer of 2010, the way gold was viewed and used by the overall market has changed.   For much of the period from Jan 1, 2008 until June 30, 2010 for example, gold (GC) has had an inconsistent relationship, in correlation terms, relative to the S&P 500 (SPY).  There were times during this period when it moved in the opposite direction, but much of this time it moved in the same direction as the market.  This can be seen in the first chart shown.

Toward the end of  2010, however, the relationship of gold relative to the stock market has changed somewhat. Gold started to become a more active instrument for investors looking to hedge themselves against downside risk in the market.   This isn’t unprecedented by any means, rather the use of gold as a hedging tool simply seemed to escalate during this time versus the past couple of years.   Gold consequently moved to consistently be more negatively correlated with the market over the past 12 months.  This can be seen in the following chart.

Where does this leave us?   It means that at least in the current environment the VIX volatility index should not be viewed as a stand alone measure.   It makes intuitive sense to us to combine both gold and the VIX into one series to properly reflect both investors who wish to hedge with gold, and those who wish to accomplish it through the VIX. We’ve put this into ratio form (GC/$VIX) in the following chart.   The first takeaway here, is that if you’re looking to hedge, the VIX may be your best bet at this point in time as a rising ratio as shown on the chart implies the VIX is cheap relative to gold.  

Last, since the absoutute level of both Gold and the VIX are well known to the market, we prefer to view this as a slow MACD (24,52,18).  A MACD gives you a much better visual of the accelearations and decelerations of a data series.  So created a weighted series using 50% Gold and 50% VIX, and then converted this into a slow MACD.  See chart below. As you can see, some of these spikes up and down have turned out to be very prescient bottoms and tops in the market.   Our read right now, is that the MACD (blue line) has just crossed above the MACD AVG (red line), and in the past that has been the prelude to a market correction.   Once we see the MACD really spike above the MACD AVG, that would be the point to remove hedges and become more short-term constructive on the market again. 

This purpose of this model is not just to try and time the market, rather to identify entry and exit points of our hedges. Judging by the above, it’s a good time to hedge, and the instrument of choice should be the VIX.


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cranky-old-geezer's picture



Gold started to become a more active instrument for investors looking to hedge themselves against downside risk in the market.  

What's this "gold as a hedge against S&P" bullshit?

Article posters like this moron just don't get it.

(Physical) gold is a store of value Bernokio can't print on a printing press and dilute its value.

Every form of paper "investment" CAN be printed on a printing press, diluting its value.

And (physical) gold has no counterparty risk either. You don't have to worry about some MF Global style "bankruptcy" taking everything in your account, because there is no account.

The author apparently still believes brokerage accounts are safe, and it's prudent to put your assets in the hands of white-collar criminals (which I believe is pretty much everybody in the financial industry).

Some people never learn. Or refuse to learn.

Everybodys All American's picture

The vix as a useful tool is highly suspect. The only volitility it measures is when the market goes down. I personally don't trust that it is free traded any longer.

q99x2's picture

Massive selling out of TVIX at this time. I like it at $10 plus a few pennies. But, you have FB in April/May and I think the banking cartel will run the market up for a grand fleecing of the public after that point. So, it is possible TVIX will announce a 4 to 1 reverse vaporization prior to April. I'd be patient unless you want to chance catching a minor correction before the FB offering.

Snidley Whipsnae's picture

VIX is fudged by bankers in The City, if not everywhere.

PM prices are manipulated by rediculous short postitions held by JPM and HSBC... With backing by Western central banks and a never ending investigation by the CFTC.

The CBs are stuck in ZIRP forever, which will eventually destroy the USDollar, the USTs, and lead to the biggest transfer of wealth in all of history. Many that think they are all set will be wiped out completely.

...and, the authors of this article fabricate charts based on a top down planned economy?

...and, advise us to hedge using PAPER VIX and PAPER GOLD?

...The authors should be selling this bs to local doctors and lawyers from their friendly, local investment advisory chain.

Here... Listen to some excellent advice from James Dines, or better yet, read the transcript... Dines is an individual who's thoughts are better read than listened to.

...and avoid all paper whenever possible. I have yet to meet a wealthy day trader. Nor have I met one that cannot be right and sit tight. The paper games will blow up and when it happens you don't want to be picking up pennies in frot of an onrushing locamotive.

"James Dines: Owning 'Wealth In The Ground' Is Your Best Bet to Surviving the Coming 'Supernova of Inflations'



gookempucky's picture



Its all moot---the big guys want AALLLL metal period. Clash of the titans is currently showing at a storage near you.

toros's picture

according to the chart, the last time the 50/50 macd crossed, the spy had a huge rally/

Dermasolarapaterraphatrima's picture

Currency wars are heating up:


Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.





DeadFred's picture

Again, based only on a gut feeling, I believe there is an ongoing effort to drive down market volume so the algos will more thoroughly own the markets. Any good technical analysis will be an opportunity to kill volume by hurting the ones who buy into the established assumptions. For example the above linked article "Will The Dreaded "Double Bottom Within A Triangle" Push The S&P Down To Triple Digits?" gave good reasons why the market would drop if VIX behaved in a certain way. The VIX complied and then the market soared. Anyone who thought the analysis was good (myself included) and invested on those lines lost money. Don't trust that old patterns are still relevant. With the HFTs in the driver's seat this time may really be different. When the Iranian (Israeli) torpedo sinks the USS Enterprise or the next tsunami hits the market reaction will drown out the HFTs, until then the S&P goes where the algos want it to.

mkkby's picture

You mean when the CIA/Mossad torpedo sinks the ready-to-be-mothballed USS Enterprise as a false flag attempt to pin the blame on Iran.

akak's picture

It was not merely a "hedge" to step from the Titanic into a lifeboat.

In today's increasing corrupt and outright criminally-controlled financial world, it seems more than just a coincidence that the word "trader" can be rearranged into "retard".

zorba THE GREEK's picture

" It was not merely a hedge to step from the Titanic into a lifeboat."

 Well said. Many people don't get it yet and when they do, it will probably be too late.

GCT's picture

Silver they should be put in jail.  Learning primarily from this site and some other sites what they did was criminal and they stole more then Madoff did.  But Corzine is a politician so he gets away with this.  I hope they all burn in hell and all go to jail!

SilverDoctors's picture

As Ann Barnhardt would say, the GAME IS OVER!!v  Time to extricate yourselves from the paper markets, and stack the phyzz!!!

We had a reader contact us yesterday who put over $500,000 into MFG on October 21st.  Yup, 10 days later over half a milion was frozen...and he's only recovered $350,000 of it 3 and a half months later.  MFG will not be the last brokerage to go down.  
Got PHyzz??

MrBinkeyWhat's picture

These charts are all real nice, but this is not about "investing". It is about survival, and preservation. Gold and Silver are real nice but they are towards the bottom of the survival chart.

See you on the other side.

Rastadamus's picture

Let Babylon burn.

williambanzai7's picture

How much soup and ammo will the Vix buy you on Judgement Day?

greensnacks's picture

I'm buying extra soup.

Most of the world food commodities are priced in US dollars and with Ben devaluing our currency more and more each day, food prices will seemingly inflate. Combine a devalued currency with severe drought across much of the Americas, US down through South America, and again, food prices look likely to jump higher. Throw in some Iranian saber rattling with higher oil pricing and a perfect storm for agflation is set.


margaris's picture

It is fitting that "VIX" in german means (more or less) "jizz".

I dont need no VIX to make me jizz...

the gold and silver bars do the job juuuust fine.