Gold and Gold Volatility

With the unfolding of the latest chapters in the financial crisis, gold has received considerable attention as a safe haven investment. The rush into gold was greatly exacerbated when investors began to lose confidence in money market funds following the ‘breaking of the buck’ at Reserve Primary Fund last Tuesday.

One week later, there is still a great deal of fear and anxiety in the financial markets and gold is trading at its highest level in almost two months.

In the chart below, I have plotted the movements of GLD, the most popular gold ETF, along with GVZ, the CBOE’s gold volatility index (or Gold VIX) which was launched back on August 1st and is based on GLD.

As is the case with OVX (CBOE oil volatility index), there has generally been a positive correlation between the price of gold and gold volatility index. Note that in early August, the correlation between GLD and GVZ switched from positive to negative, as gold volatility began to rise even as gold prices declined. On about September 11th, however, the correlation between GLD and GVZ swung back to a strong positive one, where it has held for the past two weeks. It may just be a coincidence that this switch in correlation occurred just before a week of extreme financial panic, but I wanted to at least plant that seed and note that I will be following these and other related subjects as I evaluate some of the new volatility indices in this space going forward.

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