Correlation Between Micro Gold and Natural Gas

Can any of the company-specific risk be diversified away by investing in both Micro Gold and Natural Gas at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Micro Gold and Natural Gas into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Micro Gold Futures and Natural Gas, you can compare the effects of market volatilities on Micro Gold and Natural Gas and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Micro Gold with a short position of Natural Gas. Check out your portfolio center. Please also check ongoing floating volatility patterns of Micro Gold and Natural Gas.

Diversification Opportunities for Micro Gold and Natural Gas

0.38

Correlation Coefficient

Micro Gold  Natural Gas

Weak diversification

The 3 months correlation between Micro and Natural is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Micro Gold Futures and Natural Gas in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Natural Gas and Micro Gold is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Micro Gold Futures are associated (or correlated) with Natural Gas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Natural Gas has no effect on the direction of Micro Gold i.e., Micro Gold and Natural Gas go up and down completely randomly.

Pair Corralation between Micro Gold and Natural Gas

Assuming the 90 days trading horizon Micro Gold Futures is expected to generate 0.18 times more return on investment than Natural Gas. However, Micro Gold Futures is 5.46 times less risky than Natural Gas. It trades about 0.34 of its potential returns per unit of risk. Natural Gas is currently generating about 0.03 per unit of risk. If you would invest  261,810  in Micro Gold Futures on December 29, 2024 and sell it today you would earn a total of  52,180  from holding Micro Gold Futures or generate 19.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Micro Gold Futures  vs.  Natural Gas

Micro Gold Futures

Risk-Adjusted Performance

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Micro Gold Futures are ranked lower than 26 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Micro Gold exhibited solid returns over the last few months and may actually be approaching a breakup point.

Natural Gas

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Natural Gas are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Natural Gas may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Micro Gold and Natural Gas

The main advantage of trading using opposite Micro Gold and Natural Gas positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Micro Gold position performs unexpectedly, Natural Gas can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Natural Gas will offset losses from the drop in Natural Gas' long position.

The idea behind Micro Gold Futures and Natural Gas pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.