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Updated 01:34 09/03/21

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CBOE Volatility Index

The 'Volatility Index' (ticker symbol: VIX) is a prediction of the expected volatility in the stock market, and is operated by the Chicago Board Options Exchange (CBOE). The VIX is also commonly referred to as the “Fear Index” or “Fear Gauge” by traders and analysts, and is used by some as an outlook of near-future stock market conditions. For gold investors this can then be used as a potential short-term gold forecast, given gold’s historical trend to increase in value when stock markets suffer, however as we note below this is not recommended...

Volatility, in this instance, is considered to be “ a statistical measure of variance in prices over a specific period of time ”. Rather than one company trading higher than another, volatility would focus on a large change in price. This is of interest to investors as volatility increases risk; it could signal a sudden, large increase, or it could signal an imminent crash.

VIX volatility fear index design. .

Introduced in 1993, the VIX is a real-time, 30-day, forward-looking volatility index of market expectations and sentiments. It uses stock market options, which are themselves part-valued on volatility; a higher priced option signalling a higher volatility. The complex algorithm uses previous data ('Realised volatility'), combined with current option prices, in order to generate a number representative of volatility.

The CBOE uses S&P 500 options to draw from a range of large, varied businesses, and claims to have a confidence level of 68%. The VIX is expressed as a percentage, which represents the expected degree of change. One major weakness in the VIX is that this change could be up or down - information that is obviously crucially important to many traders.

Despite being an index rather than a commodity, some investors do trade on the VIX itself. This is typically done via options, or VIX-price derivatives. The VIX does attract criticism over its accuracy; some analysts argue that it simply tracks the inverse of price, and is not actually predictive. Old models for historic economic periods have shown that the VIX would have failed to predict the Great Depression, for example.

CBOE gold volatility index

The CBOE also produces a “Gold volatility index”, based on gold futures options; another possible tool for investors to consider regarding short-term fluctuations in price. With the same flaws as the traditional fear index however, and being based on futures rather than physical bullion, it is still considered inaccurate by many analysts.

At BullionByPost we recommend investors make any decisions after careful consideration of multiple factors. Gold news, wider economic and political news, and price forecasts can all help you make the decision of when the right time to sell is.