Gold Unmoved By Market Volatility, Ready For Rally

March 15, 2018

You probably haven’t heard much about gold in the headlines this year. Overshadowed by volatile stock and bond markets, the yellow metal has slipped under the radar.

Even during the market meltdown in February, when the S&P 500 dropped precipitously and Treasury bonds tumbled, gold barely budged. A measure of gold price volatility, the Cboe Gold ETF VIX Index—which measures implied volatility on options for the SPDR Gold Trust (GLD)—is trading at half its historical level.

 

Cboe Gold ETF VIX Index

Source: Bloomberg

 

Some might criticize gold for not reacting more to the swooning stock market, but that’s not necessarily the right way to judge the metal, according to Maxwell Gold, director of investment strategy at ETF Securities.

“Many critics claim that since gold prices do not rise anytime there is an adverse market move, that its role as a diversifier has dissolved,” he said. “Spikes in equity volatility may not be the proper way of gauging gold’s relationship to equities, particularly during very short-term equity movements.”

Still A Safe Haven

In one sense, gold is doing what it’s supposed to do. Widely regarded as a safe haven, gold is counted on to provide stability during times of stress. By holding firm as other asset classes were walloped, gold successfully fulfilled that role.

Regardless, ETF Securities’ Gold says that it’s not the short-term movements in gold that matter; the yellow metal really shines as a safe haven during prolonged market downturns.

“The true effectiveness of gold during market swings becomes more evident when evaluating sustained sell-offs in equity markets as opposed to individual bouts of extreme volatility,” he explained. “When the S&P 500 suffered a peak-to-trough drawdown of 15% or more since 1987, gold significantly helped limit downside capture. Gold prices averaged a return of 7.2%, while the S&P 500 averaged a total return loss of 25% over these peak-to-trough drawdowns.”

Prices Holding Up

The most recent drop in the S&P 500 never reached that 15% threshold—it neared a 12% decline before snapping back swiftly—which may explain why gold didn’t catch a bid.

That said, as unreactive as gold has been recently, it’s actually doing pretty well in terms of performance, with prices last trading around $1,325/oz. Gold has risen for three-straight years, including an 8.6% gain in 2016, a 13.1% gain in 2017 and a 1.7% gain so far this year.

 

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