Gold And Greeks: Some Perspectives On How To Trade The Next Move

Tyler Durden's picture

From Damien Cleusix

Once more our strategy to buy gold implied volatility when it fell below 16 has worked as expected (and as it has in the past few years since we have started recommending it).

We buy the volatility to hedge our long position. What is interesting, and one of the big reason we have been doing this in the past and insisted on the concept in our quarterly reports and updates is that the implied volatility of gold has a strong tendency to rise before gold starts to decline. The steeper the rise of gold the steeper the rise in implied volatility. A hedge which rises with the price of the asset you want to hedge is a dream.

Gold implied volatility then tends to fall with the price of gold if the correction is swallow but then rise again if the correction is very large (see graph below).

So what to do now?

We maintain the forecast we made in 2002 that gold will rise to >$3,000 (and we believe it could be by a wide margin as it is expected to become (it is not yet) a bubble).

For the short-medium-term, B. Bernanke speech tomorrow could (we insist on could as we would not be surprised if it is a non-event) be strongly bullish for gold but on the other hand with Paulson funds loosing almost 40% Ytd in some of his funds and the future exchanges around the world hiking margin on gold and silver, we could see further liquidation in the near-term. Liquidation risk is also restraining us from recommending to buy all the gold producers stocks you can at the present time (but we will do it probably this autumn as our gold stock models are on strong buy modes with historic >100% 6 months return).

A return to 1500-1550 is a distinct possibility

While in the short-term we could see a short-term rebound to 1800 but we would not bet heavily on it. A move below 1720 would pave the way to the 1550 level.

What would we do?

We would sell part of the implied volatility hedge in place (at least 50%) and then we would (using GLD as the basis) risk buy September 160 puts and sell  September 150 puts.  We would also sell September 180 calls and buy September 192 calls.

You will find below the relative quantity using a 100 GLD shares as the basis. Not that we recommend buying 2* more 165 puts


The greeks of the porfolio will have to be dynamically managed.

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RobotTrader's picture


Tom O'Brien was on CNBC at 7:30 this morning, he says gold to enter a correction that could last up to a year, and the dollar is about to stage an epic rally.

achmachat's picture

the dollar is about to stage an epic rally.... downwards.



Cdad's picture

If the Bernank does nothing [save for some jiggering to the long end], Robo is correct.  If the Dixie gets above 75, then an unwind of the second most crowded trade will occur, namely criminal syndicate Wall Street bankers shorting our currency.  

You just have to love those bankers.

[Pink slips, please.]

Boston's picture

That's exactly right.  Think of how much money could/would get caught off guard.  And if DXY shoots past 80(?), I will be selling into the rally converting as many FRN's as possible name it:  HY, pm's, equities, etc. which should all be on "fire sale".

Stay liquid!

SWRichmond's picture

+1.  I personally love these "corrections," from whatever cause they may originate.  You get to watch the performance of the various producers / juniors / explorers on the way up and down.  It's like some kind of free CME-induced sorting process.  It's fucking awesome!

Not a trader, still buying and holding on fundamentals here.  Fundamentals:

1.  The Free Shit Army will burn U.S. cities to the ground when the checks stop, or when the checks lose purchasing power = The checks will keep going out, deficit be damned.  Bernanke is trapped.

2.  There is no recovery, never has been; the credit bubble is 30 years old (  Tax receipts are and remain in the shitter.  Lowering rates has had no lasting effect; negative real rates (QE) has had no lasting effect; fiscal "policy" has had no lasting effect.  The deficits will continue because the alternative is not feeding the Free Shit Army.  Bernanke is trapped. 

3.  The impulse to "do something" and the fed dot gov's impulse to "manage the economy" will guide them down the path of USD destruction.

4.  Long time members here know I've long believed we will have one final, scare-the-sheep-into-submission deflation before Bernanke unleashes the presses for the last time.  The banksters and Bernanke will use deflation to achieve political consensus.  The populist revolt against government spending will be overwhelmed by SEIU, the FSA above (well, that's the same thing as SEIU, isn't it?), seniors, government employees, and the rest.

5.  Popcorn prices will continue to skyrocket.

dxj's picture

Popcorn prices will continue to skyrocket.

... and the price of bread too, but circuses will continue to be free to the public.

cynicalskeptic's picture

They burned the Johhny-come-lately's who just jumped on the gold train (like all the 'buy-silver-crash-JP-Morgan' types who bought over 40 and freaked at the smashdown).   Predictable.  The price gets pumped - and then dumped - they make money covering all the naked shorts they wrote to push the pricce down and maybe even scared some newbiew out of their recently bought physical.  Want to bet a bunch of hedge funds sold their new gold holdings back to JP Moprgan  - leaving only 5 owners for that pile of gold oin their new vaults instead of 10?

Each smackdown goes to a higher 'low' - this is still a controlled and managed retreat, not a rout.  The big boys are still making a ton of money at every retrenchment.  Hell, JP Morgan may even manage to get out from under all its silver shorts eventually.   The big boys have a hell of a lot of free money to play with but the economic fundamentals are still working against them:

National debt is at absurd levels - and is even worse than it should be thanks to government bail outs and the taking on of all the bad debt the banks and Wall Street created - no mark to market for all the mortgage backed securities held by the Fed.   The US HAS to keep a cycle of debt roll over going ad infinitum - but they're running out of buyers.  How much has he Fed bought lately every time we have a T Bill auction?  (Is there enough money in the world to keep that cycle going?  I doubt it)

The WORLD is locked into a NEED for perpetual growth to support the current debt system - and like it or not that is an impossibility on a planet with finite resources.  You CANNOT keep growing forever and if you do you guarantee human extinction.   The US has been showing NEGATIVE real GDP 'grpwth' for over a decade.  We've been increasing debt aty an ever faster level instead of paying it down. 

The banks and Wall Street are focused on a short term 'make money ' game at the casino where they can and have fixed the games.  But the Casino is on fire and they haven't even noticed yet.  I do not see how this can end well.   At BEST we end up with a nice big war in the Middle East to grab oil supplies we can no longer pay for (putting allour unemployed to work as cannon fodder).  But our industrial base is gone and I don't see any focus on rebuilding it.  The global guys care only about the cheapest possible labor model and think that in a world on fire they'll be fine as the new lords in the castle overseeing all their new serfs.  But I suspect the future serfs will not submit all that willingly.  They're like the Roman elites who never thought they could lose control.  They thought they could control the Goths they employed to protect Rome, that a world dependent on slave labor would last forever.  They knew they'd debased their money into worthlessness but figured they could perpetuate a failing Empire forever.  They never expected the barbarians running through the streets of Rome and the collapse of Empire. 

oldman's picture

Excdellent recap, Cynical,

"The global guys care only about the cheapest possible labor model and think that in a world on fire they'll be fine as the new lords in the castle overseeing all their new serfs.  But I suspect the future serfs will not submit all that willingly." 

Regarding the ever cheaper labor in the rest of the world, these dudes are not the serfs and peons of the developed world. They will not cower as we do, nor be so divided-----they are in on-going revolutions where rhetoric is strong and meaningful.

I wish them luck with managing these these 'human resources' when the unions get off their asses and begin to organize because these dudes believe in what the unions are selling as well as democracy.

Again, thanks     om

DefiantSurf's picture

which would mean what? BTFD Bitchez

LookingWithAmazement's picture

All the doomers will turn out wrong - durable goods on the rise, a new boom is coming. Last week, a bunch of "next leg down, total collapse"-newsletters filled my mailbox. Now a big silence. No collapse, crisis over, gold and silver down, stocks up. Boring world we live in.

tmosley's picture

Uh-huh.  Yeah, talk about confirmation bias.  One "positive" data point negates the last 500 negative ones.

Enjoy your poverty.

THE DORK OF CORK's picture


You may have a point - I just ordered a backpacking wood stove from Utah , It looks like  good quality workmanship although I need to see it first - I would pay twice as much for a european product if they made the stuff.

American goods are becoming cheap.

cynicalskeptic's picture

Funny but GDX, GDXJ SIL, SLW and other proxies for the mining stocks are not down anywhere's near the same percxentage as GLD - GDX and SLW are even UP at the moment.  

While the smackdown may be hitting the metals and their ETF's  the producers are faring much better.  That would be a bullish long term indicator to me.   Maybe with throwing the kitchen sink at gold they banks don't have enough ammunition for a full front assault.  You're NOT seeing a similar smackdown on the mining stocks.  Unusual because they'd get slammed along with gold lately during the staged  attacks.  

Long-John-Silver's picture

The only was that happens is Ron Paul becomes President. Everyone else are puppets.

TheTmfreak's picture

That is a real kneeslapper considering even the "save haven" swiss are devaluing their currency.

thewhitelion's picture

I hopes he's right.  I'd like to buy some more gold.

Cleverbot's picture

You should understand that I was not reffering to time differences, but to emotional perception.

scratch_and_sniff's picture

I love that term "dynamically managed", why dont they just say "fly by the seat of your pants and hope you dont get killed".

jm's picture

dynamic hedge = hedge your hedged hedges as your core position blows up.

Dyler Turden II Esq's picture

"with Paulson funds loosing almost 40%"

The word LOSE -- to deprive, to cease to be in possession of -- is spelled L-O-S-E.  The word LOOSE -- not secured or attached -- in contrast......

Sometime circa 2003, a strange mass phenomenon occurred, in which many thousands of educated, intelligent people suddenly, and seemingly simultaneously,  forgot how to spell "lose".


DefiantSurf's picture

Loose monetary policy = lose your money

People are easily confused

RunningMan's picture

Thank goodness someone else noticed as well. The same relief I felt when i started reading ZH.

PaperWillBurn's picture

Just buy physical and wait for the CB's to start fighting over it.

sudzee's picture

My phyz stash has shown no volatility at all except for an addition yesterday. I agree that the price could come back a bit. I'm lookin forward to a paper price just above the cost of the paper and ink, maybe 3 cents. So thats 3 cents for gold and 3 cents for silver. Whoodanooe gold and silver paper would have the same value one day.

apberusdisvet's picture

With all the black swans circling, I would expect the Asian buying season to be epic.  This latest manipulation smells of desperation.  Did Hugo initiate the fear?  When  will we know if he actually received his gold and if it is real.?  We need a Venezuelan mole.

unky's picture

Newspaper reports that Gaddafi disappeared taking some Gold with him...  So now they still need to come up with the Gold  for Chavez

Long-John-Silver's picture

JP Morgan and HSBC put up that $1.2 million reward for his Dead or Alive carcass. 

Pure Evil's picture

Ship him some newly forged gold plated tungsten bars.

Once he finds out they're fakes, what the hell can he do about it, invade the US?

cynicalskeptic's picture

Expect an epic 'boating accicent' in transit.  All that tungsten....uh, 'gold' on the bottom of the sea.  Lloyds will pay off - at the bottom of the current price dip - in paper.  What's Hugo gonna do?

StychoKiller's picture

Umm, buy Physical AU from the COMEX with the Fiat AND stand for delivery?

props2009's picture

Apple trade initiated at Capital3x and it is an interesting one!

RobotTrader's picture



Despite the biggest, fastest drop in GLD in over 3 years, only 7 days of longs are underwater.  Over 98% of all GLD longs are still in a winning position.

iamtheBernank's picture

Shake it up baby....twist and shout. :-)

Ahem...lesser minds don't need to understand the transitory nature of global asset dislocations which have highly efficient transmission mechanisms (all of which I, the great and powerful Bernank have my fingers wrapped on the control dials for). You mere mortals still think that yellow metal has some value? Hah! I'll just turn that dial down to show you a thing or two. Let me know when the pain is too much (so I can turn it down some more). You think NoBama is running this show? Hah! At least Bubba Clinton knew who the real boss is (close enough anyway since he identified the bond Mkt which I, the great and powerful Bernank, keep on the dials most within my reach).

Now back to your regularly scheduled programming.

BeerGoggles's picture

Why should we trust a newsletter that can't even spell the word LOSING!

"Paulson funds loosing"

youngman's picture

I don´t know what to do know...Steve Jobs oh my..or Bernanke speaks....I am scared to death...(thumb in my mouth lying in the corner, sobbing uncontroably)....actually not...I am still buying gold....real gold...not the paper trade....all I hear is a bunch of weenies begging for more free cash from Bernanke...or crying becase their toy idol is this the E Channel now.....
its very simple now...we have spent to much..we can´t pay it back in real terms so we either default..or print to cheapen the dollar..Euro..Yen....and soon the emerging markets will start printing....Brasil does not want a strong Real...GOLD will do fine..very fine

And what really pisses me off is that I amg going to hear about APPLE all day long....every channel....all day long

Dr. Richard Head's picture

Tried to pick up 60 American Eagles at the coin shop yesterday - no luck.  Shame.  Would rather buy from a coin dealer with cash (no paper trail at the coin shop either) rather than online with a credit card. 

Thankfully this dip should free up some inventory from weaker hands.  I am betting the coin shop guy will have some next week. 

Long-John-Silver's picture

<$1550 would unleash the dogs of massive physical supply squeeze as everyone from your Black Swan Concierge to Sovereign nations jump in and buy like it's a Blue Light Special. 

props2009's picture

Here are the charts from the trade on Apple

Long-John-Silver's picture

Apple will be the main course at an Android feast.

rubearish10's picture

It's just plain ole' funny hearing all the predictions now. Oh, the bubble has burst, it's overdone, it could trade below $1500.00, bla bla, blah. Meanwhile, when it broke $1900, they were talking $2000.00, $2100.00. Come on dude, nothing has changed. hard to trade it but better to just own it.

Long-John-Silver's picture

This is exactly like the Post 5 margin calls on Silver working like that kid in the pool as he attempts to hold that volleyball down in the pool. Eventually it's going to explode upward.

ben_bernanke's picture

The dollar has been falling for a hundred years and gold did not rally that whole period. EPIC FAIL for those who seem to think gold is always correlated to the dollar.

cynicalskeptic's picture

Well gold WAS directly 'correlated; to the $US - more like locked in at a FIXED exchange rate for much of that time which is why Nixon refused to exchange any more gold for $US - gold was on sale at bargain prices under the fixed peg.   Even after the dust settled on that move, great efforts were made to hold the price of gold low to make the paper money look stronger than it was.   You can only hold the beach ball under water for so long.

dxj's picture

Gold is correlated to negative real interest rates.

tocointhephrase's picture

Thank you CME and all the other merc's for allowing me to Merk my dealer!

Johnny Lawrence's picture

For whatever it's worth...funny how all the brokerage firms came out and upped their gold targets, and then gold got smashed.  But, here's Dominic Schneider of UBS

From UBS:

Don't panic

The sharp selloff in the gold price has raised concern among investors
about whether the metal had reached unsustainable price
levels and that more weakness lies ahead. The CME Group also announced
a 27% increase in maintenance margins to USD 7,000
for each 100-oz futures contract at Comex. While a dip to the lower
range of our 1- to 3-month trading range at USD 1,724/oz is
at hand, month-to-date the metal is still up more than 7%, and
yesterday’s decline should be seen in this context. This begs the
question of whether markets will sell down the gold to price levels
prior to the US credit-rating downgrade, which would bring the
metal down to USD 1,640/oz, our former trading range low. We
do not expect this to happen. US public finances are far from getting
better, especially with economic growth likely to slump. A firm
durable goods order report for July does not change this picture.
In addition, the structural problems in the Eurozone have yet to be
tackled seriously enough to prevent a disintegration of the euro in
the long run.


We advise investors to build up long positions in gold from a diversification
perspective. Our forecasts remain unchanged. For investors
who want to be positioned more conservatively, the rise in
option volatility toward 30% offers very attractive opportunities to
set strike levels at USD 1,640/oz. Selling volatility (put options) at this
level would bring a 9-10% annual yield over the next 1-3 months.

PulauHantu29's picture

Treasury purchases will decrease by China look slike as they worry more and more about the devaluing dollar: