Friday, April 12, 2013

Gold (GLD) (IAG) - Systematic Risk Overwhelms Firm Specific Risk; If You Hold a Portfolio of Gold Stocks, You're Not Hedged

IAG is trading $5.84, down 5.8% with IV30™ up 4.2%.
GLD is trading $145.21, down 3.9% with IV30™ up 25.5%.

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GLD: SPDR Gold Trust (the Trust) is an investment trust. The Trust holds gold and issues shares (Shares) (in minimum blocks of 100,000 Shares, also referred to as Baskets) in exchange for deposits of gold and distributes gold in connection with redemption of Baskets.

IAG: AMGOLD Corporation (IAMGOLD) is a mining company. IAMGOLD‘s interests include five operating gold mines, a niobium mine, a diamond royalty, and exploration and development projects located in Africa and the Americas.

This is a note on gold, both evergreen (GLD) and specific to one company (IAG) that caught my eye due to a new annual high in vol as the stock has absolutely cratered in the last few months.

Let's start with GLD (broader topic) and then move to IAG (company specific). Here's a motivating snippet from a Yahoo! Finance article:

Gold is breaking below long term support in early trading, continuing to erode the bedrock of the idea that the yellow metal is a way to hedge against the vicissitudes of capital markets. When stocks rise, as they have all year, gold moves lower. Unfortunately for gold bugs the reverse hasn't been true of late. When stocks have been weak, gold has failed right along with it.


If gold breaks current levels and can't hold $1,470, it's got a long way to fall as far as the Option Monster is concerned. [Jon Najarian] doesn't see additional support until $1,340 and isn't going to hang around until it gets there if the first line of support doesn't hold.

As always, such price targets will be irrelevant if and when the global currency system collapses and the yellow metal finally becomes the only real currency in the world. Should that be the case, gold will presumably move much higher.

Source: Yahoo! Finance Gold Getting Hammered Again! Watch $1,470 Support Level, Says Najarian

Let's turn to the six-month stock chart for GLD -- it's eye catching...

We can see that six-months ago the ETF was trading at $170.06 and as of this writing is trading at $145.21. We can also wee the abrupt move down today and the rater incredible pop in volatility.

Now let's turn to IAG and a one-chart. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can side that IAG reached over $16 in Oct of last year and is now trading ~65% lower in less than six months.

Let's look at the one-year IV30™ chart in isolation below to examine the vol.

As the price has seen a cataclysmic decline in six months, so the vol has climbed. The IV30™ was in the 35% range in Sep of last year and is now ~55% higher. In English, this firm's value has been cut by two-thirds and the option market reflects 50% higher risk now than six-months ago. That vol level is an annual high.

Things have gotten so fast and furious in the broader picture for the precious yellow metal, that firm specific risk has taken a back seat. What do I mean?...

Let's check out the Options Tab (below) for IAG.

Note across the top the monthly vols. We can see that Apr is priced just a bit higher than May.. So what?... Well, IAG has earnings due out in May not Apr. Under normal circumstances that would push May vol considerably higher than Apr due to the firm specific event (aka earnings). But, the broader risk (systematic risk) to gold as now over shadowed firm specific risk (in this case and I venture to say in others).

Why does that matter?... If you hold a portfolio of say a number N gold stocks, you're not hedged -- you're holding the same stock N times.

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