Friday, January 30, 2009

Correlation between VIX and Gold?

Some consider the VIX index as a measure of "market fear." Indeed, the index does depend on demand for S&P 500 puts, which is a good sign that portfolio managers are worried about a market drop. I have been thinking recently that gold is another measure of "market fear." When people become concerned about the economy and the solvency of the federal government (along with inflation), they buy gold.

So, we should be able to see a correlation between the VIX and gold, right?
Let's look into it. I'll plot the daily closing value of Gold on the vertical axis and the daily closing value of the VIX on the horizontal axis. My data set goes back to 1991 and contains over 4,000 data points.

What an interesting pattern we see here! I have to say, it does not look like what I was thinking it would look like. The only re-assuring aspects of the graph are the points in the top right (when gold is high, the VIX is high, signaling a correlation) and the points in the bottom left (gold is low, VIX is low, signaling a correlation). Most of the other points, however, do not signal a correlation.
One might argue that Gold is influenced by inflation, while the VIX is not. That would be a good argument. Here is the same graph with the gold price adjusted for inflation using the GDP deflator:

Not as much of a change as we would like. I still find this graph to be very interesting and hope others might be able to comment on it’s value…

Thursday, January 15, 2009

Buy Treasuries?

I really am having a hard time understanding some of these "experts" giving advice on where to put your money. Here's another example. His position is that things are going to get worse. State and Municipal governments are going to have huge budget shortfalls this year and are going to require a bail-out by the federal government. His suggestion is to buy treasuries for safety.

Why, why, why would someone tell you to buy Treasuries right after they describe the huge amounts of debt that the government is going to have to take on? How do problems for state and munis cause a bad stock market? Where's the logic in this advisor's argument?

No one seemed to take note when some pointed out that the federal government could easily lose their AAA status. This article is from Sept 08! Think where we are now, with Obama pushing an $800 billion stimulus.

I've had enough of this "the world is ending" talk. Treasuries have peaked. It's time to sell.

Tuesday, January 6, 2009


Today's news is a real vindication of my study. As mortgage rates continue to decline to record lows, real estate prices continue to sink. This would seem counter-intuitive, but it non-the-less frequently occurs.

However, I have no doubt that the decrease in mortgage rates will eventually provide a lift to the real estate market. The stock market has had a nice rebound, possibly signaling that the worst is over. It has been quite some time since we have had a headline about a major bank failing. All of the steps that the government has taken and the nature of the business cycle will, I believe, improve economic conditions in 2009.

Happy New Year!