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Volatility: low levels belie nervousmarketsGold volatility recorded one of its lowest quarterly levels overthe last 10 years though this feat was not confined to goldalone. The fourth quarter was a quiet period for most markets.Historical volatility across various assets reached decade lows,with implied volatility not far behind (Chart 3). This finding issomewhat surprising given that uncertainty still appeared topreoccupy investors. 6Low market transaction volumes were certainly a contributor,having shifted down year-on-year in 2012 as a whole and in Q4relative to the rest of the year. 7 Low volumes could have beenindicative of investors sidelining decisions until the ‘fiscal cliff’deadline had passed. In addition, the combined efforts of theFed, European Central Bank (ECB) and Bank of Japan (BOJ)to underwrite markets with promises of unlimited monetarysupport served to quell nervousness, as did the results of theUS elections. A record net shorting of volatility futures andoptions (VIX derivatives) may have reflected this sentiment –that market volatility was now too high given the implicit ‘put’provided by central bankers.Whether this relative market calm persists rests on theoutcome of a number of events in 2013.Correlations fall in Q4 on lowersystemic riskGold’s correlation to other assets fell in Q4 (Chart 4). The lownumber of macroeconomic developments, the fall in peripheraleuro-area yields and the status quo in US politics with there-election of the Obama administration, likely affectedcorrelation as it had seemingly affected volatility. A lack ofmarket-moving events and new fundamental developments –with the exception of central bank purchases – may have led toinvestors being more influenced by positioning ahead of the‘fiscal cliff’ outcome. Certainly, the correlation between goldand the futures market non-commercial positioning, oftenrepresenting the more speculative end of investment reached amulti-year high in Q4 (Chart 5). It must be noted, however, thathigher correlation between these two series only implies acloser association, not causality.Chart 3: Market volatilities at multi-year lowsRealised volatility (%)5045403530252015105VIX index level7060504030201000Q4 2002 Q4 2004 Q4 2006 Q4 2008 Q4 2010 Q4 2012Gold return volatility (lhs)* Market volatility (lhs)* VIX index (rhs)*Volatility = annualised standard deviation of daily returns per calendar quarter. Markets: Global developed market equities,Emerging market equities, Global bonds, Commodities, US broad dollar index.Source: Bloomberg, World Gold Council6 IMF Global Financial Stability Report (GFSR), October 2012.7 Total US market cash equities volumes, Barclays, US brokers, asset managers and exchanges. 2013 Outlook: Working out the funk, January 2013.Gold Investor | Risk management and capital preservation