Thoughts on Gold and Volatility
Vance Harwood | Feb 23, 2012 06:04AM ET
Gold, loved by many and distained by at least a few (including Warren Buffett) is an unusual investment. It won’t grow, doesn’t offer a dividend, and other than jewelry and some industrial uses it gets stuck in guarded vaults for safekeeping. With no positive cash flow associated with it, the value of gold is whatever the market says it is.
In the past, investors that were bullish on gold and wanted to invest via the stock market bought stock in companies that mined gold. In theory these companies should do very well if gold prices increase, but in practice things like depleted deposits or inflated claims sometimes interfered—giving credence to the old saw, “A gold mine is a hole in the ground with a liar on top.”
With the rise of research report from ETF Securities reviews gold’s correlation to stocks, currencies, European bond CDSs and examines factors like central bank purchases that might drive the price of gold in 2012.
After we talked I pulled up some comparison charts. This first one I generated, starting in March 2009, shows the two investments to be pretty darn correlated. GLD is the bar chart, SPY is the yellow line. Click to enlarge.
GLD vs SPY
Increasing the time span to start in May 2007 gives a dramatically different picture.
GLD vs SPY starting May '07
Subjectively gold climbs or holds its value well during the more extreme phases of volatility—the 2008/2009 crash, the flash crash, and the fall 2011 correction. The next chart adds the VIX index, which makes it a busy chart, but better illustrates gold’s correlation with volatility.
GLD vs SPY vs VIX index
In summary, a casual look suggests that gold is well correlated with the general stock market during quiet times, and correlated with the VIX during fearful times. If this behavior persists it will be a very valuable portion of a diversified portfolio.
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