Posted on: May 2nd, 2017, by Karl Eggerss
The other day, I was driving and heard a commercial on the radio. “Radio” is such an old term. Anyways, there I was listening and as usual, I heard a gold commercial. I immediately thought “Which ’80s ex-celebrity is this?”. But, it was simply a regular old voice over dude. Same tactic. Try and scare you into thinking everything’s horrible and the market’s going to crash and therefore you should buy gold. It was a classic fear sales technique. But, it got me thinking.
We all agree that when there’s fear, investors buy protection generally. They do this typically by using options. Ok, not every investor. Probably not most. But, the big boys on Wall Street that move the markets. They do. When they buy protection, the Volatility Index (VIX) goes up. So, if the VIX goes up when there’s fear, and the man on the radio said gold goes up when there’s fear, then gold and the VIX should move together.
After doing some analysis, it’s interesting to see the results. For the test, I used a correlation of 50 previous days. Since 2007, there have been times that gold and the VIX moved together (as they should if the thesis is true) and times they moved opposite of each other. But, it’s random at best. There are several time frames and correlation settings we could use to get varied results. But, I believe gold is not a fear trade. I never have and never will. Gold is perhaps one of the best diversifiers there is because of its unpredictability. It goes up when the dollar goes down, sometimes. It goes up when there’s inflation. It goes up when there’s fear, sometimes. It goes up when stocks fall, sometimes. The problem is that sometimes isn’t good enough.
I’m not saying investors can’t have a portion of their portfolio in gold (although I like commodities in general better). But, for some reason, many believe it’s the end all be all when things go bad. It’s not. The data doesn’t suggest it. Gold should be bought as a diversifier or should be traded in my humble opinion.
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