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Will Higher Volatility Help Gold? Maybe Not Says This Analyst

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(Kitco News) - It seems to be common knowledge that when market volatility rises, so does the gold price.

But, for one Australian-based analyst, that might not be the case.

"The reliability of safe-haven demand translating through to higher gold prices is not consistent," said Vivek Dhar, associate director of mining and energy commodities at Commonwealth Bank, in a recent post.

Dhar showcased a chart that tracked price action in the CBOE Volatility Index (VIX) and in spot gold during times of uncertainty; events included the Lehman Brothers collapse, the euro debt crisis, and the time when concerns over China’s growth took center stage.

"The last 4 major spikes in VIX have had mixed results on gold prices, with the largest spike in 2008 -- the Lehman Brothers collapse -- actually pushing gold prices lower."

To Dhar, the important price determinant for gold will be U.S. 10-year bond yields. 

“Gold prices and U.S. 10-year real yields have historically had a tight inverse relationship," he said. "Lower yields increased the appeal of non-U.S. interest bearing assets like gold."

The correlations between the two assets should continue to hold, Dhar said, adding that further rate increases by the Federal Reserve will put downside pressure on gold.

Gold prices managed to rally late last week on growing tensions between the U.S. and North Korea. Prices have cooled off after coming close to breaking above $1,300 an ounce. December Comex gold futures last traded at $1,290 an ounce, down 0.31% on the day. 

U.S. 10-year bond yields are recovering from last week’s drop to a 1.5-month low, last trading at 2.206%.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.