Gold and the overall market volatility are closely linked. During turbulence in the market and rising risk, investors often jump to haven assets like gold (IAU) and silver (SLV) and also, sometimes, to Treasuries. We can thus expect the prices to rise during such scenarios.
The market’s current volatility could give a positive bounce to gold. Gold’s correlation with market volatility, as depicted below by the CBOE Volatility Index, or VIX, was high during 4Q15, when the first interest rate hike in almost a decade took place.
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However, of late, the volatility markets (VIXY) (VXX) are behaving strangely, and volatility has been seen dropping since the month of November. Investors in the volatility market are facing losses. The VIX index sank to its three-year low in January 2017. According to the Bloomberg data, the Barclays Capital’s the iPath S&P 500 VIX Short-Term Futures Exchange-Traded Note (VXX) has fallen almost 16% this year.
The drop in volatility could lure the investors out of haven assets, and in an environment where interest rates are rising, the future demand for gold seems to be questionable. A likely fall in the price of the precious metals will also lead to a decline in the price of the mining stocks like Goldcorp (GG), Royal Gold (RGLD), First Majestic Silver (AG), and Alamos Gold (AGI).
Many investors look at gold when the uncertainty in the market is rising. However, the chances are that the VIX indicator and other volatility funds could, instead, perform better. Remember, investment in volatility comes with risks, but higher risk can sometimes yield higher returns.