Tuesday, August 23, 2011

SPY and GLD correlations and volatility.

Apparently the value of the GLD ETF (an Exchange Traded Fund that holds gold) has exceeded the value of the SPY ETF (which holds stocks from the S&P 500).  All this gold is held in bank vaults in London (which in light of recent riots may not be that sensible).  The total amount of gold held by the fund in these vaults is about 41. 5 million ounces, which is about 1300 tons.  That seems like a lot of gold.

In the article, a hedge fund manager was quoted as saying that
“Gold has become something of a near-perfect hedge for financial assets such as stocks,”
This got me thinking - I wonder what the correlation between GLD and SPY is?

Here are the daily correlations.  Note that GLD has been trading since 2004.
2004-2011: 0.0506
2008-2011: 0.0108
2010: 0.1961
2011: -0.2655

First of all we can see that over the long run, there has only been a weak correlation between GLD and SPY.  In 2010 however this correlation became positive and quite strongly so.   But for the first half of 2011 we can see a strong negative correlation.  While not a "near perfect" hedge, it certainly looks like GLD is moving against stocks.  The problem of course is predicting how long this movement will continue and at what point in time (if ever) the old pattern of a small positive correlation will reassert itself.

Looking at daily annualized standard deviations, (assuming 250 trading days) we see that GLD is a little less volatile that SPY.

2004-2011
SPY Std Dev:  22.6%
GLD Std Dev: 21.0%

2011
SPY Std Dev. 20.00%
GLD Std Dev. 15.24%

Surprisingly SPY is not as volatile as you might think - perhaps a classic case of investors anchoring their beliefs too much on recent market gyrations.

While I don't make prognostications, it does seem likely that a large amount of the demand for GLD may be coming from people moving money out of stocks.  If this is the case, then if and when the stock market starts to rebound, we should see a pretty rapid fall in the price of gold.