In times of fear, buy gold? Not so fast

It's common market wisdom: In scary and volatile times, gold rules the roost. Unfortunately, the facts don't quite bear out that intuition.

That is, there is no significant relationship between the CBOE Volatility Index — often known as the "fear index" — and gold. Actually, over the past five years, the correlation between the gold ETF (GLD) and the VIX has been mildly negative on the whole.


The volatility index, known as the VIX, is often considered the best measure of fear in the marketplace. That's because it is computed from the prices of options on the S&P 500, and most use S&P options to hedge against downside rather than speculate on upside. Notably, the VIX generally closely tracks recent volatility, even though it technically measures expectations of future volatility.

What the chart above shows is that the relationship between the yellow metal and volatility is anything but stable, with the GLD and the VIX shifting from bitter enemies to best of friends and back. Over the past five years, there is almost no relationship between the two, with a correlation of -0.02. Meanwhile, this year, however, the correlation has jumped to 0.32.

So what's a more reliable predictor of gold? The dollar, for one. Over the past five years, the GLD and the dollar index (which tracks the greenback's moves against a basket of major currencies, most notably the euro) have enjoyed a correlation of -0.37, indicating that a dollar fall could reasonably be expected to lead to a gold rise.

Further, the 60-day correlation between the two rarely turns positive.


Before buying gold, therefore, investors might be wise to ignore their predictions of future volatility, and focus on what they think the dollar will do.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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