The GVZ index – otherwise known as the gold volatility index – is a leading measure of risk in the precious metal market. Because of this, it’s often called the ‘gold VIX’.
- What is the GVZ index?
- How does the GVZ index work?
- What does the gold volatility index tell you?
- How to read the gold VIX
- How do you use the gold volatility index?
What is the GVZ index?
The GVZ index is a financial market that measures expected gold volatility in the coming 30 days using GLD options. It is often referred to as the ‘gold VIX’ because it fulfils a similar function to the volatility index – but for the precious metal instead of the S&P 500.
The GVZ has been calculated by the Chicago Board Options Exchange – the same company that makes the VIX – since 2009 and can be an important indicator for precious metals traders. It is offered as an exchange traded fund, with the full name of the CBOE Gold ETF Volatility Index.
There are volatility indices for other markets too, including:
- VIX (S&P 500)
- MOVE Index (US T-bonds)
- OVX (Crude oil)
- VXEEM (Emerging markets)
- EVZ (EUR/USD)
How does the GVZ work?
The GVZ works in the same way as the VIX – by assessing the prices of at-the-money options set to expire in the near term. But while the VIX does this for the S&P 500, the GVZ does it for gold. In doing so, it can tell you how volatile the markets expect gold to be over the next 30 days.
It’s worth noting that the GVZ doesn’t track the price of gold itself. Instead, it uses options trading on the SPDR Gold Trust ETF (GLD.P), one of the largest gold ETFs. A high gold volatility index reading could mean that gold is rising, falling or moving between wide support and resistance levels – although typically, when the GVZ is spiking it means gold’s value is going down.
Essentially, the gold VIX examines the premiums traders are paying for call and put options on the GLD.P and uses that to determine which strike prices are expected to be hit before each option expires. This tells you how much the markets expect gold’s price to move in the coming month.
What does the gold volatility index tell you?
The gold volatility index tells you how much gold movement is expected by the markets in the coming 30 days – otherwise known as its implied volatility. It looks forward, assessing anticipated volatility, so is considered a leading indicator.
The GVZ doesn’t tell you whether gold itself is being bought and sold. Instead, it is a measure of potential incoming volatility based on options trading. However, as we’ve already noted, it does tend to have an inverse relationship to the price of the precious metal.
Why? Because when gold is in freefall, traders buy up out-of-the-money put options to hedge against their risk. This causes the premiums on such options to rise, which makes the GVZ go up. Gold bull markets tend to be less severe than bear ones, so the options trading is less pronounced – which means the volatility index doesn’t rise as much.
While it is seen as a fairly reliable measure of volatility, the gold VIX won’t exactly predict the level of gold volatility for the coming month. Often, it slightly exaggerates gold’s upcoming movement – because, by the time the price action occurs, the volatility has already been priced in.
How to read the gold VIX
To read the gold VIX, you simply take a reading of its current price. The index moves between 0 and 100, just like an oscillator.
- When the GVZ is below 12, it is seen as low volatility
- Between 12 and 20 is normal volatility
- Above 20 is high volatility
When fear about gold prices is high, the GVZ will tend to rise. When it falls and traders aren’t anticipating major gold volatility, the index will fall.
How do you use the gold volatility index?
There are two main ways to use the gold volatility index in your trading: as a measure of potential future price action on the precious metal itself, and as a wider indicator of market sentiment.
Measuring gold risk with the GVZ
The most common use of the GVZ is to measure current risk levels on the SPDR Gold ETF – and therefore on gold itself. As we’ve seen, a higher GVZ reading means that the markets are anticipating higher levels of gold risk.
When the GVZ index spikes or falls, it is worth performing your own fundamental or technical analysis to uncover the reasons why.
You can even compare the GVZ with other similar markets such as the MOVE index or VIX to see the current relative risk between asset classes.
Using the GVZ to predict market sentiment
Much like the VIX for stocks, the GVZ can also be used as a general indicator of fear in the markets – particularly for metals.
Gold is a known safe-haven asset, which can mean that a high reading on the GVZ can mean traders are anticipating that gold is going to spike due to unrest or volatility elsewhere. The highest reading on the gold volatility index, for instance, was seen in March 2020 as markets panicked over the COVID crisis. This period saw a significant gold rally.
However, while the GVZ offers valuable insights for traders and investors, it is essential to recognize its limitations and the complexities of the financial markets. Incorporating the GVZ into your trading strategy should be done thoughtfully and with an understanding of its potential impact on your decision-making process.
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