Can Google Trends predict gold returns and its implied volatility?

Abstract

We investigate the impact of investor attention and economic uncertainty on gold price changes and their volatility. We use Google searches for “gold” as a measure of investor attention, considering searches originated in US, India, and globally. We find that Google searches originated in India are more relevant for the gold market than global searches or searches originated in the US. Increased Google searches are associated with gold price declines and increased volatility. Moreover, this relationship is not just a correlation. It also holds in predictive manner in both directions: 1) Increased Google searches are followed by gold price declines and high volatility and 2) gold price declines and high volatility are followed by increased Google searches. We consider three measures of economic uncertainty, the VIX index, the Economic Policy Uncertainty index and the TED spread, and find that the VIX index has the strongest impact on gold. High levels of the VIX index are both contemporaneously related and also predict gold price increases and high volatility.