Gold’s Strength Proven From Lack of Volatility

Gold emerged as the standout asset with volatility levels of under 3%

gold lacks volatility

With just a few months in, 2018 has already seen unprecedented levels of volatility that caught many investors off-guard. According to a recent article on Kitco, February saw the VIX volatility gauge record its biggest single-day spike ever, with data going back several decades.

The jump came as an even bigger shock says author Anna Golubova since it followed a period of record low volatility, which paired with the stock market’s performance to lull the markets into a false sense of security. The sudden shift in volatility plunged the stock market index after a lengthy absence of turmoil, as the Dow likewise experienced its worst single-day decline ever.

These movements were accompanied by a predictable return of fear to the markets writes Golubova, with investors wondering whether the swings signaled a coming correction of the stock market. Although this remains a point of debate, one investment firm says that the VIX spike represented a correction of its own.

The article notes that Sprott Asset Management stated in their report that February was nothing short of a volatility bubble bursting. In the months leading up to the spike, multiple analysts cautioned that record-low volatility was anomalous and unlikely to become a permanent fixture.

As the VIX index continued to inflate, various asset classes, ranging from equities to bonds and currencies, experienced wild volatility swings of up to 235%. But according to the article, gold bullion emerged as the standout asset during this storm of unpredictability, having held onto its volatility levels of under 3%. Sprott’s portfolio manager Shree Kargutkar notes that this is particularly impressive since no other asset managed to provide anywhere near as much safety during one of the shakiest periods in recent memory.

To Kargutkar, there is little doubt that February’s events signal a long-overdue return to higher volatility levels. He believes as the markets settle in the new status quo, gold will remain the ideal asset to own as last month’s spike exemplified its resilience against the kind of turbulence that engulfs every other asset.

With historically-low volatility behind us, Kargutkar says investors should waste no time acclimatizing to the new environment. While his firm has advocated an allocation to gold even during calmer periods, the manager feels that now is the optimal time for an investment strategy that minimizes risk through sensible hedging.

Aside from market volatility, Kargutkar added a declining dollar and inflationary pressures to the list of tailwinds for the metal, stating that the recent capital flow into bullion shows that interest in gold is rising.