Despite Rising Stock Prices, A Fear Trade Mounts

Despite Rising Stock Prices, A Fear Trade Mounts

Michael Kramer  | May 22, 2020 07:41

This article was written exclusively for

Very quietly, safe-haven assets have been rallying, and in some cases, to prices not seen in years. The big rally in assets like gold have come despite a massive rally in the equity market. While some investors will think the sudden surge in gold is due to expectations of rapid inflation, it seems more likely that the push into gold has more to do with the safety the precious metal offers.

One reason why investors may be in search of safety is that the Volatility Index (VIX) remains at stubbornly elevated levels around 30, a level suggesting equity markets are still volatile. That volatility is expected to stay high based on the VIX term structure, which is currently suggesting that the VIX index will remain high for many months to come.

Given the inverse relationship between the VIX and the equity market, it likely means stocks will be in for a wild ride over that same period. 

Gold Futures

Inflation Expectations Are Low

Believe it or not, gold prices have reached levels last seen in the year 2012. The recent surge in gold started in March, as equity prices and risk assets were tanking. But gold’s strong move higher has continued despite the massive rebound in equity prices since the March lows. The move appears to have more to do with investors seeking safety rather than rising inflation rates from the Fed’s massive quantitative easing measures.

Looking at inflation gauges, such as 5-year-5-year forward inflation expectations, they're at some of their lowest levels since 2003, with only the period during 2008 and 2009 providing lower expectations.

5Y-5Y Forward Inflation Expectation Rate

Additionally, the U.S. dollar has been remarkably stable if not stronger during the whole pandemic period, also signaling that inflationary pressures are not likely to be a factor in the near-term. It leaves the current move higher in gold, at the hands of those looking for a safe haven to park their money, potentially a sign investors fear more stock market volatility.

The VIX Index Remains High

Based on the term-structure of the VIX, it seems to confirm the notion that volatility is likely to stay elevated for the foreseeable future. According to data from VIX Central, the VIX index is currently expected to remain above 30 until November. That would take us right into the U.S. presidential election, after which the VIX is expected to fall to around 29 through the new year.

VIX Term Structure

Sharp Drawdowns to Come?

These expectations would suggest that the equity market could easily see some very sharp drawdowns over that period. It seems to indicate that despite the massive rebound in equity prices and risk assets, all may not be smooth sailing. The rising costs of gold and expectations for an elevated VIX index seem to indicate that investors are still expecting volatility to remain very high in the equity market and that we may not see those volatility levels settle down until some time in 2021. The fear of these severe drawdowns may very well be the underlying reason why investors have been flocking into assets like gold.

It may very well be the case that as long as the coronavirus pandemic remains, investors could stay fearful and ready to scramble at the first sign infection rates are beginning to rise or the economic recovery is stalling. Until a time comes that the virus is only a distant memory, we can expect volatility to remain high, and for investors to continue to pile money into safe-haven assets.

Michael Kramer

Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (UK) English (India) English (Canada) English (Australia) English (South Africa) English (Philippines) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
Saving Changes


Download the App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors. is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.