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The one constant this year has been market volatility. Stock market
volatility, including for the mining stocks, has waxed and waned throughout
2011 but has been recurrent more this year than in the previous two years. After
a brief period of dormancy, volatility has once again been on the rise.
We’ll discuss the implications of this volatility increase for stocks
as well as the gold price in this report.
The CBOE Volatility Index (VIX) shows the recurring theme of volatility
throughout the year to date. The VIX, which measures the so-called
“fear premium” and is a good indication of increased fear among
options traders, has recently spiked as you can see in the following chart.
This VIX “rally” was in response to the pronounced fear over the
U.S. debt debate as well as debt fears in the euro zone. Traders were visibly
spooked by the high-profile media discussion of the consequences of the
failure of Congress to raise the debt ceiling and of a possible U.S. bond
downgrade. These fears were averted but until now volatility continues to
dominate the equities market as the currently high level of fear has yet to
recede.
Aside from the latest flow of bearish news headlines pertaining to the
debt problem, market volatility is both a cyclical as well as a structural
problem. Volatility has increased in recent years as we’ve gotten
closer to the bottom of the 120-year Kress Cycle, which is the master
long-term financial/economic cycle of inflation/deflation. As we head closer
to the fateful year 2014, when the cycle finally bottoms, we’ve
witnessed at least two key cyclical events: the 12-year cycle peak in 2008,
which exacerbated the credit crisis, and the 10-year cycle peak of late 2009.
The 6-year cycle component of the 120-year cycle, which is the last of the
long-term cycles currently up, is scheduled to peak in late September/early
October this year.
The downward force of the 120-year cycle is converging with central
bank attempts at fighting deflation through increasing money and credit. This
is what is creating much of the volatility as the cyclical downward force of
the Kress cycle is converging with the counter-cyclical force of quantitative
easing (QE), et al, to create a massive cross-current in the financial
market. Eventually, though, the downward force of the 120-year Kress cycle
will simply overwhelm any and all attempts at government intervention in the
financial market economy. In the end, the forces of nature always prevail
against human efforts at reversing nature’s force.
Another reason for the increased volatility of recent years can be
found in the structure and make up of today’s financial marketplace.
Consider these comments from Samuel Kress, the namesake of the Kress cycle
series. In the July 25 issue of his SineScope
advisory he writes, “Market alpha has been waning and is being
augmented with beta. Hedge fund managers are pressed for returns and are
enhancing beta, which is reflected in increased volatility. Unfortunately,
too many of the managers are young, inexperienced and reactionary. This has
resulted in the increased volatility not only on a weekly basis but sometimes
[on a] daily [basis].”
Volatility is a manifestation of fear among market participants. Fear
is a reaction to the unknown. Fear and uncertainty are major drivers of the
gold price from a long term standpoint. Investors have a visceral instinct to
run to gold as a financial safe haven during times of uncertainty. When fear
surpasses greed as the dominant emotion among investors, as it has since
about 2001, it serves as a powerful negative force against equities, but also
as a strong driver in favor of gold. The run-up in the gold price since
volatility first began manifesting is one testament to this.
 
Indeed, the yellow metal has benefited for the most part from the
extreme fear that is plaguing investors. Gold has risen to a series of new
all-time highs in just the last few days, even making a new intraday high on
Thursday, Aug. 4, before closing with a small loss. Gold has overstretched
from its key short-term and interim trend lines, however, and could use a
correction before continuing its main upward trend. The main consideration
for gold is that it is a fear hedge and with all the fear that continues to
dominate the economic headlines, gold should continue to have plenty of fuel
for its long-term bull market.
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Not surprisingly, many traders and investors are looking for a
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in gains and minimize potential losses from whipsaws.
Clif Droke
Editor, The Daily Durban Deep/XAU Report
Clifdroke.com
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