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Gold versus the VIX: which is the better bet, as US election uncertainty lingers?


The gold price moved back above US$1,900 as the US election results continued to be contested, albeit that a Biden win looked the more likely outcome.

The rise reflected both those factors. The continuing uncertainty around the result is bullish for gold, as it fulfils its usual safe have status. But on the other hand, expectations are that if Biden does end up taking the White House, any forthcoming stimulus package is likely to be that much larger, and supportive of gold since it will inevitably involve a massive money printing operation.

Meanwhile, the VIX volatility index (INDEXCBOE:VIX) has been relatively placid. There was something of an uptick in the week before the election, but that was followed by a subsequent downward correction.

At its current levels the VIX is trading at roughly double where it was before the start of the coronavirus crisis, depending on precisely how you date it, but is broadly flat on levels its been trading at since July, allowing for the recent rise and correction.

At the height of the coronavirus crisis the VIX was trading at more than three times where it is now, and more than five times where it was before the virus outbreak went global. In terms of market uncertainty and volatility then, this situation with the election doesn’t even come close to the jitters the market got about coronavirus.

But what’s interesting is that although the VIX delivered the biggest short-term gains anywhere around during the height of the coronavirus crisis, it’s also given up most of those gains. Gold’s gains were substantial, although not quite so stunning, and broadly speaking it’s managed to hold on to them.

So, while tucking away the VIX for a rainy day might be a useful hedge, the real money to be made on it is on the short-term trade. Gold, on the other hand, as its proponents have always said, looks to be a much longer bet.

So, while the election is moving the needle a bit on gold, it’s really the conditions that were set back in March with the spread of the Chinese virus that are underpinning the price. And, whether it’s a Biden presidency, or the still faint possibility of a Trump presidency, that takes America through its next four years, the markets now know for sure that coronavirus will be a key, if not the only issue either way.

In that sense, however unpleasant the reality is likely to be on the ground, the uncertainty is mitigated, and the VIX becomes less attractive.

By contrast, the near certainty that the Fed will continue to devalue its own currency under the legitimizing umbrella of Modern Monetary Theory, will set the floor for gold pretty high in the years to come.

Proponents of Modern Monetary Theory like to argue that their measures don’t lead to inflation, and for years the efficiencies generated by outsourcing and the globalization of supply chains supported that contention. But all the while, gold was MMT’s dirty little secret. It’s up 600% over the past 20 years, 75% over the past five years, and 28% over the past year.

It’s hard to envisage a world in which that doesn’t look like inflation. Some may try to argue this is it. But frankly with the US election as yet not completely decided and the coronavirus still causing fear, loathing and panic wherever the modern media goes, most people have got other things on their minds. Gold has been a secure store of value for thousands of years, and it looks as though it will stay that way, however attractive the VIX may be day-to-day.

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