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I was always under the impression that gold as a safe haven was more or less inversely correlated to the general market.

After using the HRA function in Bloomberg I saw that the correlation is just -0.019 as you can see on the right.

enter image description here

On the other hand when I use the regression analysis with the VIX I get an inverse correlation of -0.710.

enter image description here

I think i've been making the error that gold and the SPX are inversely correlated when in fact they are not strongly correlated at all and a more efficient hedge against volatility is using a VIX instrument.

Could somebody help me understand this?

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    $\begingroup$ an immediate considation is that you are comparing daily returns of gold & spx, and weekly returns of vix and spx. Also, what time are these fixings observed? I suspect GOLDS is not snapped at the same time as SPX. $\endgroup$ – will Dec 29 '19 at 10:58
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I do not think that you were terribly wrong thinking that gold and SPX (or equity market in general) are negatively correlated. The reason behind this is that gold and stocks are in fact negatively correlated in stress periods. Here are some stress periods and the correlations for SPX and gold (and silver):

enter image description here

However, if you include normal periods, then the relationship gets more blurred.

Also, if you are hedging your equity exposures, why don't you just use futures?

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    $\begingroup$ Thank you for the very thorough explanation! I made the mistake of thinking gold had a significant negative correlation with the market. This seems to happen only in stress periods. In other periods it is not always the case. To answer your question: I'm hedging with futures but i'm looking for new methods too. It's both a practicaly excersise as it is one for curiousity! Thank you again! $\endgroup$ – Jorisdrees Dec 24 '19 at 8:39
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Gold's "safe haven" credentials and its correlation to equities are not necessarily quite the same thing.

Gold is a safe haven, in the sense that whatever happens in the economy, an ounce will always remain an ounce. It remains gloriously unchanged, whatever else happens around it. Which is why asset allocators often think about it as akin to a perpetual zero-coupon inflation-linked bond.

So its correlation to equities is really telling you more about equities than about gold. Gold is gloriously unchanged, whatever happens; so all the price movement that generates any correlation is really a story about what moves equities, such that they are independent of gold (as opposed to negatively correlated).

In essence, this becomes a story about real interest rates, which is a broad proxy for the cost of capital. Higher real is the kiss of death for gold, because I can buy positive-yielding inflation-linked bonds that give me a coupon that gold does not offer. And vice versa. The question is how stocks respond to the same. Higher real might mean a booming economy, and thus booming profits. Good for stocks. It might mean a tight monetary policy that discounts profits (from an unchanged economic growth rate) more aggressively. This would be bad for stocks. XYZ's profits might be 10% higher in a decade's time; but if the aggregate interest from now to then is 20% higher, those future profits will be worth less today.

So the stock:gold correlation is really a proxy for whether it's the economic hot/cold versus the financial loose/tight that's driving stock prices. In recent years, no surprise, it's the financial>economic that wins, hands down.

hope this helps.

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  • $\begingroup$ Thank you that is a very good explanation! It seems to me that the price action of everything is really based a lot on the interest rates. Very interesting thank you for giving a clear explanation! $\endgroup$ – Jorisdrees Jan 2 at 16:01
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    $\begingroup$ Thanks for the kind words. I would just, well-meant words of warning, have at look a little deeper at the reaction functions after 2013 (esp 2015 and 2018), versus the 2011 cut-off above. These have all been "nothing-hedge" events ;-( #justsaying $\endgroup$ – demully Jan 3 at 0:07

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