The Curious Nature of Gold Volatility

The trading action in the SPDR Gold Trust ETF (GLD – 141.63) continues to grab the headlines.  Of course the recent headlines are not as loud as when GLD dropped about 20 points in two days, but traders are still keeping a close eye on gold.   This time the news is about the move to the upside as GLD has rebounded from the low 130’s and is now resting in the low 140’s.  Something that did not get a lot of attention today with the 3 point plus move to the upside in GLD was the action implied volatility of GLD options as represented by the CBOE Gold ETF Volatility Index (GVZ – 22.35).  I guess most market watchers just do not get as excited about volatility indexes as I do.  However, there is a point to be made based on GVZ action today.   Despite GLD having a very bullish day GVZ rose as well.  GVZ was up 4% on the day from yesterday’s close of 21.49.

With the recent dramatic drop in GLD, GVZ ran from the low teens to the 30’s in the course of just a couple of days.  This move in gold volatility got a lot of attention.  Since the memory of the GLD drop is still a recent one GVZ has continued to hold in the low twenties.  As a point of context, average GVZ for the first quarter of 2013 was very close to 14.  The interesting action in GVZ today was that with GLD moving up, so did GVZ.   For those that are only familiar with the behavior of implied volatility is through observing the CBOE Volatility Index or VIX this may seem unusual.  Typically when the S&P 500 moves higher VIX moves down and when the S&P 500 drops VIX will move up on the day.  This relationship holds up about 80% of trading days.  This is not how the implied volatility of GLD options behaves.

CBOE has GVZ data going back to 2008.  Comparing daily changes in GLD to GVZ shows that just under 60% of trading days the two will move in the opposite direction.  So today was in the about 40% camp where GVZ moved in sync with GLD.   So unlike equity market index volatility (VIX, VXN, VXEEM, VXEWZ) volatility on GLD can (and often does) rise when the price of GLD moves up.  This piece of knowledge by itself explains why volatility traders may want to explore GVZ futures or options as a different way to play macro market movements.

The chart below shows GLD vs. GVZ from the beginning of 2012 through the first quarter of 2013.  It is fairly obvious that at times GVZ and GLD move together and at times they trend apart.

More on GVZ – www.cboe.com/gvz

GVZ GLD