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Albert Sung is the author of the Katchum Macro-Economic Blog, monitoring breaking economic news from a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at... More
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  • Correlation: Gold Volatility Vs. Gold Price 1 comment
    Feb 1, 2013 12:09 PM | about stocks: GLD

    When I see the current volatility in the gold market, one day it's up 1% and the next day it drops 1%, then I'm wondering if it was like this historically too.

    So I took the historic gold price and looked at the percentage changes (Chart 1). If you think of it deeply, you could say that when the volatility increases, the gold price should increase too because higher absolute changes in gold price indicate that this volatility can only decline if you have a higher gold price.

    So let's look at the results.

    Chart 1 tells me that we had high volatility in each recession (grey area). So in recessions, people buy gold and sell gold at a higher pace, probably due to fear. 1980 had the biggest volatility, followed by 1975 and 2008.

    (click to enlarge)
    Chart 1: Gold Percentage Change
    If we then look at the gold price, we see that 1980 has the biggest rise in gold price, followed by 1975 and 2008.
    (click to enlarge)
    Chart 2: Gold Price

    The same can be said about low volatility. The lowest volatile period for gold was in 1995 and indeed we see a drop in the gold price in that period.

    Currently the volatility is average, it is higher than in 1995, but lower than in 1980. But you can see that the momentum in volatility is building up and that indicates to higher gold prices in the future.

    Stocks: GLD
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  • datageak
    , contributor
    Comments (3) | Send Message
    Hi Katchum,
    This relation seems to be true only in the long term and not be super strong. If you look at daily data the relation does not seem to be very meaningful, check here for instance: http://bit.ly/XFnESo FRED_GOLDAMGBD228NLBM, FRED_GVZCLS?period=5y


    What is interesting is that the relation between gold volatility and market volatility is quite strong:
    http://bit.ly/XFnESo FRED_VIXCLS, FRED_GVZCLS?period=5y


    Since there is a super strong inverse relationship between market volatility and equity market movements:
    http://bit.ly/XFnESo FRED_SP500, FRED_VIXCLS,?period=5y


    I would say that if you foresee higher gold volatility to go short the market rather than long gold. Based on historical data you are more likely to make money.
    12 Mar 2013, 07:31 AM Reply Like
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