vrijdag 1 februari 2013

Correlation: Gold Volatility Vs. Gold Price

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 (which looks like a soundwave) 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.
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.
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.

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