Correlation Between 10 Year and Gold Futures

Can any of the company-specific risk be diversified away by investing in both 10 Year and Gold Futures 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 10 Year and Gold Futures into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 10 Year T Note Futures and Gold Futures, you can compare the effects of market volatilities on 10 Year and Gold Futures 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 10 Year with a short position of Gold Futures. Check out your portfolio center. Please also check ongoing floating volatility patterns of 10 Year and Gold Futures.

Diversification Opportunities for 10 Year and Gold Futures

0.74

Correlation Coefficient

10 Year  Gold Futures

Poor diversification

The 3 months correlation between ZNUSD and Gold is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding 10 Year T Note Futures and Gold Futures in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gold Futures and 10 Year 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 10 Year T Note Futures are associated (or correlated) with Gold Futures. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gold Futures has no effect on the direction of 10 Year i.e., 10 Year and Gold Futures go up and down completely randomly.

Pair Corralation between 10 Year and Gold Futures

Assuming the 90 days horizon 10 Year is expected to generate 5.98 times less return on investment than Gold Futures. But when comparing it to its historical volatility, 10 Year T Note Futures is 2.7 times less risky than Gold Futures. It trades about 0.12 of its potential returns per unit of risk. Gold Futures is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  263,450  in Gold Futures on December 25, 2024 and sell it today you would earn a total of  39,230  from holding Gold Futures or generate 14.89% return on investment over 90 days.

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

10 Year T Note Futures  vs.  Gold Futures

10 Year T

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in 10 Year T Note Futures are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, 10 Year is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Gold Futures

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Gold Futures are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Gold Futures exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with 10 Year and Gold Futures

The main advantage of trading using opposite 10 Year and Gold Futures positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 10 Year position performs unexpectedly, Gold Futures 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 Gold Futures will offset losses from the drop in Gold Futures' long position.

The idea behind 10 Year T Note Futures and Gold Futures 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.