Gold ETFs May Not Be Much of a Volatility Hedge

London (Apr 9)  Investors have turned to gold exchange traded funds as a safe-haven play in times of market stress. However, the precious metal may not always act as a hedge against stock volatility.

Over the past five years, the correlation between the SPDR Gold Shares (NYSEArca: GLD) and the CBOE Volatility Index, or VIX, has been mildly negative, reports Alex Rosenberg for CNBC. GLD and VIX have exhibited a -0.02 correlation in the past five years, or almost no relationship.

The VIX, or so-called fear index, is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. VIX futures allow investors to profit during rising volatility or hedge against short-term turns.

Since the S&P 500’s low on February 11, equity market volatility dissipated, as reflected by the VIX. The VIX traded at a high of 30.9 on February 11 but hovered near 15.2 on Friday, plunging over 50% in two months. The VIX-related iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) fell 36.3% and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) declined 36.5% over the same period.

Meanwhile, GLD has remained relatively unchanged since its February 11 close.

Alternatively, the U.S. dollar may be a better indicator of where the gold prices are heading. Over the past five years, GLD and the dollar index, which follows the greenback against a basket of major developed currencies, has exhibited a correlation of -0.37%, or a falling dollar would reasonably correspond with rising gold bullion.

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The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of developed country currencies, fell 1.2% since February 11.

Currently, the U.S. dollar is weakening on the more dovish Federal Reserve outlook. The Fed has stated it will likely hike interest rates two times later this year, down from its previously projected four rate hikes.

As the U.S. dollar depreciates, commodities, like gold, that are priced in USD become cheaper for foreign buyers. Moreover, gold is seen as a better store of value in the face of a weakening U.S. currency.

Source:  ETFtrends