For the month of June to date the long SPDR Gold Trust (GLD) short iShares Silver Trust (SLV) trade has made a net 4.12% return. While those are heady returns in a month where S&P returns are only marginally positive and TLT returns have been marginally negative. For the year, the GLD-SLV long-short is up 18.5% as of last night and ballooned out to over 31% positive at the March lows. At that juncture, the return of the long short safety trade that is one of the staples of our favored safety asset index (EABCDI) was almost 4 times more profitable than a long iShares Barclays 20+ Yr Treasury Bond (TLT) position alone. I believe there is room for significant retracement for the long short trade if the economic impact of COVID-19 difficulties takes the luster off the recovery.
GLD-SLV can be executed in several ways but we’d consider selling SLV call spreads to buy GLD calls (in a conservative ratio) counting on the dilution impact of the Fed’s and authorities’ stimulus to weaken the dollar. We also see the President’s desired dollar weakening to pressure China as GLD supportive. Regarding SLV, there has been a definite connection of SLV performance to cyclical recovery hopes and I see any increased concerns on COVID-19 impacts as moving SLV back towards $14.5. That may not be enough to warrant buying puts or put spreads but it does make selling SLV’s higher volatility attractive. The ratio of SLV:GLD 2m IV remains at the upper end of its range (lending to the pair trade). This is most clearly shown in a graphic of the spread between SLV implied Volatility and GLD implied volatility. It remains wide and is one of the reasons. This trade is perceived as asymmetric.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG) put spreads still look attractive if any economic rollover continues to increase bankruptcies, defaults and reminds investors that the Fed can’t buy all the bonds. HYG 2m IV is in its 78th percentile and 13% expensive to forecast. 2m Skew is fair.
Our concerns about weaker equities have been confirmed and iShares MSCI Emerging Markets Index (EEM) still looks to have at least 5% downside in our opinion. Interestingly, as often happens in declines, the US dollar strengthened yesterday. We believe any knee jerk dollar strengthening from here should be sold by buying GLD, Guggenheim CurrencyShares Japanese (FXY), and selling EEM. EEM 2m IV is in its 79th percentile and 4% cheap to forecast. 2m Skew is 1.63 standard deviations over its mean. FXY 2m IV is in its 63rd percentile and 5% expensive to forecast. 2m Skew is 0.55 standard deviations over its mean.