Does the market volatility linked to the recent gold rally?

The recent rises in the gold prices 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 prices? 

Let’s examine the correlation between the volatility of the S&P500 index (vix) with gold prices (daily percent 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 prices declined. Second, the correlation between gold price and volatility of the S&P500 index (vix) was positive during July and August; i.e. as the vix rose, gold prices inclined.

Correlation Gold Prices and S&P500 VIX MAY AUGUST 2011 15 AUUGST

During May and June the gold price 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 percent changes in gold price 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.

SCATTER Gold & Silver Prices and S&P500 VIX MAY JUNE 2011 15 AUUGST

But then the tables have turned and during July and August, gold prices 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.

SCATTER Gold & Silver Prices and S&P500 VIX JULY AUGUST 2011 15 AUUGST

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 prices. 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 haven, which is usually gold; these changes consequentially drive gold prices up.

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Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.