Jodie M. Gunzberg, vice president at S&P Dow Jones Indices, wrote an interesting piece in the S&P Dow Jones Indices blog, Indexology. The blog is titled “Fear Gauge Spikes: Let’s Play Hot Potato” and in it Gunzberg tries to answer a number of questions but the basic question is why have commodities reacted differently to spikes in the Chicago Board Options Volatility Index (VIX), or fear gauge as Gunzberg refers to it as, since the credit crisis of 2008 than it did to spikes in the VIX pre 2008.
The reference to the VIX itself is a bit of subterfuge in my opinion because basically what she is describing though avoiding saying explicitly is that commodities markets in general and the S&P GSCI in particular has become increasingly correlated to the S&P 500 since 2008 (See chart below).
She asks, “For what risk does the commodity investor get paid? At what point is the fear gauge so high the risk gets passed like a hot potato? The answers to these questions will help explain why post the global financial crisis there has been a link between VIX spikes and commodity losses.”
Huh? You can compare any asset classes to each other but commodity traders do not trade off of the VIX. The VIX measures implied volatility in the S&P 500. Speculators always assume the risk of hedgers, when they are wrong they get out. They don’t pass the risk around; they just realize they were wrong or no longer want to assume the risk.
She then asks, “At what point is the fear gauge so high the risk needs to be passed like a hot potato?”
Her answer, “in times of financial distress, or “post-crisis”, commodity investors reduce their net long positions in response to an increase in the risk as measured by VIX, causing the risk to flow back to the hedgers.”
Once again, huh?