After months of simmering beneath the surface, geopolitical
Korean Peninsula flared yet again last week.
Market volatility spiked, as did the gold price, a scenario often
seen when uncertainty towards the future becomes a little more
opaque than usual.
However, while the escalation in the war of words between Donald
Trump and Pyongyang delivered a short-term flutter across
markets, history suggests that even a substantial spike in
financial market volatility may not necessarily translate to
further gains in the gold price.
This chart from the Commonwealth Bank explains why.
It overlays the spot gold price against movements in the CBOE VIX
Index, a measure of expected volatility in US stocks looking one
month ahead, over the past decade.
As it reveals, past spikes in volatility has not always led to
strength in gold prices.
Sometimes it has, others it hasn’t, as explained by Vivek Dhar,
mining and energy commodities analyst at the Commonwealth Bank.
“The reliability of safe haven demand translating through to
higher gold prices is not consistent,” says Dhar.
“The last 4 major spikes in VIX have had mixed results on gold
prices, with the largest spike in 2008 — the Lehman Brothers
collapse — actually pushing gold prices lower.”
Rather than expected stock market volatility, Dhar says that
movements in real (inflation-adjusted) US 10-year bond yields
remains a key underlying driver of gold prices at present.
“Gold prices and US 10-year real yields have historically had a
tight inverse relationship,” he says. “Lower yields increased the
appeal of non-US interest bearing assets like gold.”
Dhar says that this relationship will continue to hold, noting
that further US interest rate increases will drive yields higher,
placing additional downside pressure on gold prices.
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