Somewhere between a Brexit vote, global negative interest rate policy, a U.S. election and a less steep fed hike path, traders the world over are finding excuses to go risk-off. Since none of this is altogether new or surprising, it's been fairly moderated in asset prices, but the derivatives have been host to a lot of action.

Pound sterling implied volatility has gone from 5-10 percent (1m) to almost 30 percent, which is unheard of. German 10-year yields printed their first ever negative yield to maturity at -2 bps this morning, and Swiss yields negative out beyond 25 years. To move from anecdotes to data, the weighted average of global sovereign yields across all maturities is now at an all-time low of 1.43 percent.

The whole world is turning into Japan it would seem and trying to fix it with monetary stimulus because fiscal stimulus and infrastructure spending just seems a bridge too far (sorry).

Bull Case

  • Yields have taken a new leg lower globally. There's likely closer to $11 trillion in negative yielding sovereign debt in the world now.
  • Brexit odds at 40 percent roughly.
  • For scale: the sum total of gold ETF holdings and COMEX inventories is only 88.5 billion (with a B). That's less than 1 percent in comparison.
  • ETF ounces adding between 50 and 100k consistently now on a daily basis, continuing a trend that started back in January with only a brief pause in march and early April.
  • Even in the U.S., the 2s10s spread now is at lows (89bps) going back to the 2007 lead-up to the GFC. Traders expect some tightening but have zero growth priced in (can be a double-edged sword if upside econ surprise).
  • The ECB is now buying corporate bonds too, because what the western world needs is cheaper rates for corporate giants.
  • BoE Thursday (do nothing, but strong "stay" rhetoric) and BoJ (I have no idea) add fuel to the fire this week.
  • If nothing else, gold seems to drift higher when left in a headline vacuum, especially so with lower yields globally.

Bear Case

  • Much of the fear and insurance is priced in: VIX at 22, GBP vols and carry way up. Heard in passing the insurance is so rich, that many with GBP exposure are cross hedging EUR instead.
  • EFP on gold at 2.82 and platinum is incredibly rich, and the arb opportunity between Ldn and NYC is the biggest I have seen in a long time. Indicative of a ton of tourists still in that will be quick to take profits more likely.
  • The dollar has actually been strengthening since June 8, which usually puts a headwind against further gold gains, but the strong February move had a similar contra-dollar aspect to it.
  • Vols — the pervasive call skew and massive pop in atm implied volatility is a further source of length and usually puts some speed breaks on further rallies as traders will be able to sell each rally with insurance.
  • CFTC positioning remains elevated, but we can theoretically sustain these levels in times of crisis, like 2009 through 2011. If the trend to lower rates continues, this will sustain, but I think the carry will scare people off again like it did two weeks ago in the June-August roll.
  • Physical coin and bar demand is lackluster, but scrap supply is improving.
  • In the more medium term (post-Brexit, etc.), the U.S. economy is improving slowly and despite the weak headline NFP number, I think it is a supply pinch, not demand issue that is hurting hiring. That will drive wage inflation and force the Fed's hand. It's not imminent by any means but no one is pricing this in.
  • RSI at 65 is indicative that all else being equal, we are likely to run out of steam before testing $1,300 again.
  • A June hike may be dead, but I'd bet FOMC wants to keep July alive in Wednesday's comment, despite big risks from the Brexit. I think they will toe the line between those two.

Chart 1

Brexit fear, priced. 1m atm implied vol for GBPUSD cross is 30 percent, which is insane and yet, also perhaps fairly priced given how big of a role it is. One thing I keep in mind with these patriotic moments (like the Scottish referendum): there is usually a quiet "stay" vote that registers much better than the polling. Still the 30-40 percent probability of leaving the EU is a lot of binary event risk to stomach.

Chart 2

Implied vols plus the call skew (15 delta for 3 mo tenor) is very rich versus realized volatility. This is a fairly rare occurrence to see implied v. realized move in opposite directions like this and usually means the event it is pricing ahead of becomes less exciting from a price perspective. If you have the stomach for it, there is some value here.

Chart 3 Bonus

Gold v. the USD (inverted) and XAUEUR (lower). The demand for metal has largely come out of western nations of late, with the U.S. participating less. The case in point is comparing the XAUUSD (white, candle) v. the XAUEUR cross (lower field). Gold-euro is looking to test the 2016 highs of €1150, which is near the 2015 highs as well. A breakout would be significant sign of distress.

Coin Toss

We have several indicators (EFP, vols and dollar strength) saying there is just a bit too much length in the spec market, yet the ETF sees builds every day. I was wrong last week in a big way expecting a retest of the 100 DMA, and instead we are back near cyclic highs. I think the strength of the Brexit implications caught me off guard, and we have been higher every day since, now $40 up.

I hate to make a bearish call without it first running out of steam, but all of the scary stuff just seems priced in here, especially in the options market across gold and currencies. At the (seemingly probable) risk of repeating my same error, I would look for stagnant or even lower prices without further headline scares from Brexit, Fed (Wednesday), Boe or BoJ (Thursday).