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What the Rise in the CBOE Volatility Index Has to Do with Gold

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Global tensions

Besides the dollar movement, another crucial element that could have a strong influence on gold and other precious metal prices is the overall volatility of the markets. Trade war fears between the United States and China have moved the markets over the past few days, and the rout of the equity markets gave further support. Russia also commented that it would harshly react to the expelling of Russian diplomats from the United States. The political crisis between Russia and the West is also supportive of gold.

Here, we are using the CBOE Volatility Index (or VIX) as a calculator for overall market unrest. The VIX was trading at 21% on Monday, March 26, 2018.

If we look at the chart over the past month, we see that gold has been closely tracking the VIX, especially over the past week.

VIX and gold

Gold and the VIX can see high correlations during extreme uncertainty in the market. Since gold is famously known as a safety asset, it usually rises when there is a significant slump in the market such as the one in 2008. During market instability, investors often take shelter in non-yield-bearing gold since it can provide a buffer against risk.

Gold has historically been in sync with the VIX (VIXY) (VXZ), although the connection between the two may not always hold firm during extreme uncertainty. If we look at the correlation reading of gold to the VIX over the past two years, it has been only 0.20. The longer-term relationship between the two may be distorted.

Mining companies Wheaton Precious Metals (SLW), Franco-Nevada (FNV), Randgold Resources (GOLD), and Yamana Gold (AUY) have also seen their prices rise following a surge in gold. They have risen 3.8%, 1.8%, 3.5%, and 8%, respectively, on a five-day trailing basis.

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