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How Volatility Is Affecting Gold


Feb. 14 2018, Updated 8:16 a.m. ET

Volatility and gold

Another critical factor that has affected precious metals is market volatility, which is tracked by the CBOE Volatility Index or VIX (VIXY). Gold is known to track market volatility. The higher the unrest in the market, the higher the demand for haven assets like gold. This trend is because investors get nervous during periods of unrest and prefer to park their money in assets that could provide stable returns.

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Though the returns on gold haven’t been exceptional over the past year, they have been stable. Equities, in general, could provide considerable returns, but with more risk. The SPDR Dow Jones Industrial Average ETF (DIA) gave a return of 24% in 2017, while the gold-based SPDR Gold Shares (GLD) delivered a return of 10.5% during the same timeframe.

Correlation analysis

The above chart shows the tendency of gold and volatility to move together. This trend was especially evident during 1Q16. However, gold and the VIX Index have a one-year correlation of 0.20.

A correlation reading of 0.20 indicates that during the last one year, about 20% of the time, gold moved in the same direction as VIX. However, the recent spike in volatility, which caused the VIX to jump to 37.3 on February 5, was unable to give much support to gold. Mining stocks like Agnico-Eagle Mines (AEM), New Gold (NGD), Newmont Mining (NEM), and Gold Fields (GFI) have also experienced a loss over the past one month. These stocks dropped 8.3%, 17.6%, 3.5%, and 7.7%, respectively.


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