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What’s Behind the Recent Surge in Volatility?

It’s no secret that people don’t like uncertainty. By nature, humans are generally creatures of habit—preferring stability and safe outcomes. This is especially true when it comes to financial matters.

However, financial markets are almost always facing some type of uncertainty, be it corporate earnings, interest rates, or geopolitical events. The issues are often benign and the outcomes are non-events, but as we know, there are always surprises causing markets to react.

The volatility index, commonly referred to as the VIX, is a measure of investor uncertainty and fear of the unknown. The VIX can go months at a time meandering along without much direction and impact on the markets. Other times, it will react on a relatively mundane piece of news, then gain momentum on each subsequent development.

Case in point: the past seven trading days.

It began last week with a seemingly positive third quarter US GDP report. Initial headline growth of 2.9% looked very positive and gold reacted negatively. However, after details were digested, gold reversed course as the underlying driver was called into question. Soft consumer spending, housing data, and inventory loading were areas of concerns.

Next came the announcement by the FBI Director James Comey  they were re-opening the investigation into Hillary Clinton’s private email server. In part, gold quickly proceeded to rally $30/ounce as the presidential election odds shifted.

Another contributing factor to the recent spike in volatility is inflation. Several indicators have recently shown inflation to be increasing in many regions of the world. This is being reflected by the sell-off in treasuries and increasing yields. The 10-year US Treasury has risen over 20% since July, signaling greater inflation expectations.

As these news items were being digested, third quarter corporate earnings were in full swing. Mixed to negative results had already been sending the S&P 500 lower in the three preceding trading sessions, and continued to do so this week as well.

The confluence of factors sent the VIX soaring to levels not seen since the “Brexit” vote.

The rate of increase in the VIX has not occurred since the financial crisis of 2008. The 8-consecutive-day increase is unprecedented, going from 13.5 on October 25 to 22 on November 3—a 60% increase. The next largest 8-day moves in recent history are 23% in November 2013 and 32% in March 2012.

As investors fled to safe-haven assets gold continued to move higher as the volatility increased, being bid up $40/oz, to $1,306 by Wednesday.

We frequently talk about using the volatility in gold to make strategic purchases during periods of weakness. This recent bout of volatility will likely fade, perhaps as early as next week when clarity is added to the US presidential election.

When the volatility decreases, it may bring a retreat in the price of gold.

If you’re watching the market for a better entry point to finish your allocation to physical bullion, or perhaps make an initial investment, stay tuned during the next few trading days. There could be a buying opportunity on the horizon.

 

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