Correlation between interest rates and commodities.

T

TimeCorrosion

I was looking at charts of the past few year and trying to determine how strong the correlation is between interest rates and commodities. Higher interest rates mean stronger dollar and lower gold or silver. In the past decade when Fed raised or lowered interest rates, I just don't see a correlation as apparent as that between S&P500 and VIX (negative correlation).

If the correlation isn't strong between gold/silver/crude oil and interest rates, then gold/silver/crude may still rise despite recent dollar strength or future rate hikes. I am trying to factor this into a hedge.

Anyone care to comment?
 
Quote from TimeCorrosion:

I was looking at charts of the past few year and trying to determine how strong the correlation is between interest rates and commodities. Higher interest rates mean stronger dollar and lower gold or silver. In the past decade when Fed raised or lowered interest rates, I just don't see a correlation as apparent as that between S&P500 and VIX (negative correlation).

If the correlation isn't strong between gold/silver/crude oil and interest rates, then gold/silver/crude may still rise despite recent dollar strength or future rate hikes. I am trying to factor this into a hedge.

Anyone care to comment?
More...

you should be able to find a general commodity index and simply run the correlation to the interest rate series you are describing. Compare that result to the correlation between spx and vix over the same period. I'd guess it's not as strong, but you should take the time to quantify that observation. Gold and dollar has a very dynamic relationship over time (i.e. changes and is not reliable).
 
Quote from TimeCorrosion:

I was looking at charts of the past few year and trying to determine how strong the correlation is between interest rates and commodities. Higher interest rates mean stronger dollar and lower gold or silver. In the past decade when Fed raised or lowered interest rates, I just don't see a correlation as apparent as that between S&P500 and VIX (negative correlation).

If the correlation isn't strong between gold/silver/crude oil and interest rates, then gold/silver/crude may still rise despite recent dollar strength or future rate hikes. I am trying to factor this into a hedge.

Anyone care to comment?
More...

Be prepared that correlations will vary over time. So be very careful in your interpretations. Look e.g. at the 2009 rally in almost all asset classes. And the break-down of historically well-established covariances during 2008 that helped wipe out a large number of hedge funds.

Beware that hedging comes with a risk in itself that naturally depends on how you use the correlations and the underlying relationship between your trades and the hedge.

An example. It is very different to hedge a long only stock portfolio from market risk using index futures compared to hedging it with a mix of gold/crude/currencies/fixed income. In the first case you can rely on the correlation being high and stable over time as long as the long portfolio is diversified. In the second you must be prepared for correlations to change, sometimes dramatically.
 
Quote from TimeCorrosion:


Anyone care to comment?
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theres free data off yahoo and google.

theres free software like R and python.

that software has free libraries that get data from yahoo or google.

that software has functions that correlate the data


if anyone wants to pay me for doing this let me know. the cost is $10,000USD. I'll add some nice looking charts too.
 
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