Gold and longer-maturity bonds are getting outsized inflows. Protective equity options are outdrawing speculative contracts, while volatility markets are positioning for fresh disruptions.

It comes as signs of froth are emerging. The S&P 500 Index is on the cusp of its best quarter in more than 80 years even as fears of a second coronavirus wave grow. Speculative mania reigns among retail investors, while the likes of JPMorgan Chase & Co. are turning bullish on U.S. stocks.

But for all the fears that Wall Street is running headlong into risk in one of the fastest rebounds ever, hedging demand shows the frenzy is being met with some vigilance.

Eoin Treacy's view

When equities yield 4% and a 10% correction is normal, then hedging with bonds that yield 6% and have less volatility makes sense. It is the relationship risk parity strategies were based on even thought the original numbers were different. However today we have equities that yield 2% with 30% drawdown risk. Bonds yield 0.7% but volatility hit decade highs, more than double current levels, just a couple of months ago.

The challenge for investors is the risk today from government bonds, when deficits are exploding, is degrading the currencies in which debts will be settled. The traditional hedging metric assumes a common currency is a constant upon which calculations can be based. However, if one is really worried about the integrity of the currency and the clear intention of governments to pursue inflation at all costs, then an alternative hedge is more appealing.

As the barometer against which all fiat currencies are measured gold has a unique attraction as a hedging vehicle. It hit a new recovery high today in US Dollars and a sustained move below the 200-day MA would be required to question medium-term scope for additional upside.