Correlation and Lag Trades

Gold and Crude Oil in normal day to day movements are not overly correlated. They do not move tick for tick or take a lead from one another as strongly as the 10yr note and the 30yr bond.

However during times of volatility, that correlation can increase and they do start following each other. Additionally, it’s not uncommon to see one market lag behind the other when volatility picks up.

After the European announcement today, we had this happen. Both markets rallied on the news, then took a step back for a rest, then Crude start moving higher with good momentum while Gold continued to tick down for another three minutes. Then gold picks up and heads higher. It was a great ‘follow the leader’ trade that had very little risk.

The chart below show illustrates.

1 – Shows the initial rally in both
2 – Shows the small pullback in both
3 – Shows the Crude taking off again.
4 – Then three minutes later Gold follows.

The lesson – always watch these related markets when volatility picks up. Volatility creates uncertainty and this creates these kinds of lag trades. The more you look, the more you will see them.