This segment discusses the correlation between gold and stocks (the SPX), gold and crude oil and between gold and its own volatility (GVZ). Some commonly held myths are proven wrong here.
Some think that gold is a hedge against an adverse move in stocks. A table of the correlations between gold and the SPX and also of gold to crude oil, on a 1 month and 3 month basis proves that wrong. A table showed later was displayed of the GLD and SPX correlations from 2004 to present. The table included various VIX levels and their correlations. The various levels included a VIX level above 30, 20 to 30, 10 to 20 and under 10. The very low correlation though does provide an opportunity for diversification.
An important decision is which vehicle we should use when trading gold. A table was displayed of both /GC (Gold Future) and GLD (Gold ETF). The table included what each represents, their notional value, the average daily volume in both and the at-the-money (ATM) option open interest for both. The decision when trading options is easy.
Every tastytrader should know that when the SPX goes up the VIX goes down and vice versa. The negative correlation is VERY strong. There is a correlation with gold to its equivalent of the VIX, the GVZ but it is not so clear cut. An table of the correlation of the S&P 500 to its implied volatility (IV) and Gold to its implied volatility (GVZ) were displayed. The table included the percentage of time each implied volatility was negatively correlated and the average correlation. A chart was displayed of the distribution of correlations between the S&P 500 and its implied volatility (VIX) and of the distribution of correlations between Gold and its implied volatility (GVZ). There were notable differences.
When the SPX is rising strongly that usually means there are no good opportunities to sell volatility on the SPX itself. Gold is negatively correlated with its implied volatility (GVZ) the majority of the time, but we see a larger range.This means that we can have opportunity in gold even when prices are increasing.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways and other important information about the relationship of gold to stocks and to its own volatility.
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