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How Market Volatility Could Steer Gold

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Uncertainty and gold

Gold is used as a haven asset during rising times of uncertainty in the market. The political and financial unrest in the market boosts the demand for precious metals.

Donald Trump’s presidency so far has cast a shadow over his ability to stand by his campaign promises. The failure of the health care bill added to the market risk and also put a bounce in gold.

Gold acts as a buffer to market risk and volatility. Volatility in the market is predicted by the Volatility Index (or VIX) (VIXY) (VXZ).

The revival of precious metals also gave a boost to mining-based stocks such as the VanEck Vectors Junior Gold Miners ETF (GDXJ) and the Sprott Gold Miners ETF (SGDM). These two funds have risen 2.4% and 5.0%, respectively, year-to-date.

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Dual impact on gold

Another important market phenomenon that investors often analyze when investing in gold is inflation. Gold is a famous hedge against inflation. A reduction in volatility could mean a downward swing for gold, and a rise in inflation could mean more demand for gold. That relationship could be a two-way street for gold, and its direction remains uncertain.

Mining shares are also known to follow gold closely. Buenaventura Mining (BVN), Hecla Mining (HL), Alacer Gold (ASR), and Harmony Gold (HMY) are a few stocks that revived during the past week.

In the next part of this series, we’ll look at the relationship between gold and the US dollar.

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