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Gold Market Performance in 2012

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This analysis is extracted from the “HyperVolatility – End of the Year Report 2012” that can be downloaded for free by clicking here. Gold prices are historically linked to the performance of risky assets. In fact, many portfolio managers and traders have always used gold futures or options to hedge their exposure against inflation or violent market retracements. The reason why trading gold became so difficult in the last 2-3 years is because a gold trader should really understand what is the main force driving the price in every specific moment. Are investors using gold as a hedge against inflation or as a protection against potential plunges in equity indices?


Gold Futures


As we can clearly see gold prices achieved their top in March, when they tested the $1,780 level, but they subsequently dropped for almost 3 consecutive months. The plunge in gold prices accompanied the “depression” in equities (although equity indices began retracing in May) but as soon as the selling pressure dissipated gold futures fluctuated within the $1,550 – $1,620 interval for an extended period of time. In the second half of the year, the rise in gold prices mirrored the performance of risky assets meaning that many traders and investors were using the gold market as a hedge against inflation. In particular, the rally to the $1,800 level was caused by the expansive monetary policies adopted by the Fed and the ECB which forced many market players to cover their cash portfolios with an inflation-bounded asset class. Furthermore, the fact that gold futures began plummeting in October, when all equity indices were in downtrend, proves that many participants were using this market in order to compensate for the depreciation of their cash portfolios. Let’s  have a look at volatility now:


Gold Futures Volatility


The volatility of the gold market has been fairly stable throughout the entire year and its long term equilibrium range can be easily identified in the 0.85% – 0.9% interval (13.4% – 14.2% annualised). It is important to point out that the conditional variance in the gold market follows an inverted leverage effect which means that it increases when the buying pressure augments and it drops when the selling pressure pushes the price action down. In fact, the evident volatility plunge occurred in June accompanied the massive selling pressure which dragged gold futures back into the $1,550 area. A further example of such relationship is the big spike visible on the left-hand side of the chart. The big explosion coincided with the great rise in the price action that occurred at the end of February – beginning of March. As you can clearly see the volatility augmented dramatically when gold prices rallied to $1,780. (If you are interested in trading gold futures or options you might want to read our research “Trading Gold and Silver: A Realized Volatility Approach”). The next chart shows how, over the last year, gold futures moved in respect to other asset classes.  Did gold futures positively correlate more to risky assets or safe havens?


 Gold Correlation Matrix


The answer to the previous question is, without a doubt, risky assets. The above reported chart evidently suggests that gold futures have been used to cover investors’ cash positions against inflation. The correlation study indicates that the gold market shows a strong positive correlation to all equity indices: E-Mini S&P500 futures (+0.54), FTSE/MIB futures (+0.76), Euro futures (+0.57) and DAX futures (+0.66). Also, it has a weak positive correlation to the WTI (+0.21) and it is almost no correlated at all to the Japanese Yen (+0.04). Gold has a rather weak negative relationship with Treasuries: German Bund -0.37 and an astonishing -0.12 in respect to Treasury Bonds. The only asset class that could be said to be “decently” negatively correlated to gold is the VIX Index.

Now, it is clear that the gold market was not used as a hedge against drops in equity markets because, had that been the case, we would have seen a negative relationship with E-Mini S&P500, DAX, Euro and FTSE/MIB futures.

The performance of the gold market in 2012 are evidently suggesting that many investors and portfolio managers entered long positions simply to counterbalance the rise in inflation provoked by the expansive monetary policies adopted by both the Fed and the ECB. Hence, we can conclude, without fear of contradiction, that over the 2012 gold futures proved to be a rather poor asset class to hold as a hedging tool against potential plunges in equity indices.

If you want to receive weekly forecasts on gold and other asset class check the HyperVolatility Forecast Service. We guarantee you a 14 day free trial. Send us an email at to know more

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About the author

Vito Turitto is a professional Volatility trader whose focus is on energy options. Vito started his trading career in the City of London trading options on crude oil and, to a lesser extent, gold options. His market neutral strategies are centered on volatility arbitrage.

Vito is the founder of the trading and market analytics company HyperVolatility ( and he is interested in volatility modelling, financial econometrics and quantitative finance. Vito Turitto holds a BA in International Economics Relations from the University of Rome "La Sapienza" and received his Master of Science in International Finance and Investment in London after completing a dissertation on forecasting volatility in the American crude oil market via stochastic volatility models.

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