The recent rises in the gold during July and August were accompanied with sharp changes in the financial markets including Forex and stock markets. Does the high volatility in the financial markets in recent month linked to the rally in gold?
Let’s examine the correlation between the volatility of S&P500 (vix) with gold (daily per cent changes) in the past few months.
The chart below shows the linear correlation of these two data sets during between April and August (up to date). This measurement isn’t reliable as it varies one a monthly scale and isn’t stable; however we can draw some insights from it. First, during April-May the linear correlation was negative, i.e. as the volatility inclined, gold declined. Second, the correlation between gold and volatility of the S&P500 (vix) was positive during July and August; i.e. as the vix rose, gold inclined.
During May and June the gold declined by 1.3% and 2.21%, respectively. On the other hand during those months, the vix inclined very moderately by 4.75% during May and 6.93% during June.
The chart below shows the daily per cent changes in gold and vix index during May and June. As seen below, the changes are low for both data sets and there seems to have a negative correlation.
But then the tables have turned and during July and August, gold soared by 8.54% in July and 6.83% in August. The vix also inclined very sharply by 58.8% in July and 44% in August (UTD). The chart below demonstrates the positive correlation between these two data sets and also the higher rates and fluctuations.
These findings suggest that the high volatility in the stock market and in this case the S&P500 is linked with the recent hike in gold. As the volatility in the stock markets grew mainly in July and August, gold price benefited from this shift and increased very sharply. Or in other words, as the uncertainty in the financial markets grows, traders tend to seek a safe heaven, which is usually gold; these changes consequentially drive gold up.
For further reading: Gold and silver prices outlook for August 2011
Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.