Is gold back as a fear index?

U.S. gold futures ($GC) moved opposite the trend of the broader riskier markets and strengthened recently. At the same time, the VIX, the US equity markets traditional fear index, has also moved higher.

The reappearance of a rising correlation between gold (and silver) and the VIX as the markets immediately turned their attention to the fiscal cliff and the European debt crises after the U.S. election uncertainty has been removed. What exactly is the fiscal cliff? It is a term first used by Ben Bernanke in his speech to the Congress in February 2012, referring to the enacted legislation causing an automatic spending cuts and tax hikes on Dec. 31, 2012 of about $7 trillion over the next 10 years and about $600 billion in 2013. What's to fear? Even after the US election, the politics in the U.S. looks to remain in a gridlock, and if no action is taken, in the first half of 2013 U.S. recession becomes likely.

In Europe, the ECB refuses to lower interest rates further (for the time being). Spain has still not asked for the ECB to purchase its bonds. At same time, the Euro area finance ministers will not likely make a final decision to release the €31.5 billion of aid to Greece probably until November 26.

China's gold demand is expected to rise 1% in 2012, overtaking India to become the largest gold consumer in the world. Although overall economic growth and therefore gold demand slowed in 2012 compared to 2011, gold jewelry purchases in China continues to support overall consumption.

Author: Chris Davies

Posted in: China , Fear index , GLD , SLV , VIX