Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Does Gold’s Correlation with Stocks Mean that it’s No Longer a Safe Haven?

Commodities / Gold and Silver 2011 Dec 05, 2011 - 02:16 AM GMT

By: Bob_Kirtley

Commodities

Best Financial Markets Analysis ArticleIn this article we examine the current and past relationship between gold and the S&P 500 index and whether or not gold still remains a “safe haven”. In the past gold has often had a low positive relationship with the S&P, with that relationship trending negative in times of economic turbulence (hence gold’s safe haven status) but that trend has not held over the past 10 weeks. We aim to answer the implications this has for gold in the future.


The stock market (by definition) slows and offers low or negative returns in times of economic strife. The modern day response from central banks is to pump (print) money into the economy in a bid to fuel growth or as is the current situation - delay the significant part of the hangover.

The extremely loose monetary policy which central banks world over are adopting is keeping interest rates low. Real interest rates are currently extremely low or negative (which is observed in the US TIPS market) and this is extremely bullish for gold. For new readers, we have covered these dynamics in past articles.

In the current circumstances, some policy actions are bullish for both gold and the stock market. The U.S. economy is faltering and there are no signs of improvement. The Fed’s response is to operate incredibly loose monetary policy to stimulate growth and reduce unemployment. Monetary easing raises the value of gold through devaluation in the USD amongst other reasons.

The desired outcome of loose monetary policy is a boost for the economy as a whole. The equities market is the timeliest and one of the more accurate gauges for the state of the economy. Lower interest rates and an increased money supply (monetary easing) boost the stock market – an elementary economic concept.

What we can deduce is that monetary easing is bullish for gold and the S&P 500. In times of economic strife, the two are likely to be more highly correlated.

As a result, if the market is focused on whether the Federal Reserve or ECB will ease monetary policy, then gold and the S&P will likely follow each other. This is the situation we currently find ourselves in, especially with the immense uncertainty surrounding the Eurozone.




Some are calling the end of gold as the traditional safe haven asset in times of turbulence in the equities market. When they say this, they mean gold and the S&P 500 are now much more (and predominantly) positively correlated than in the past. Whilst some think this is a cause for concern for all those using gold as a safe haven hedge, we disagree.

This conclusion is extremely premature. Periods of positive correlation with the S&P are far from unprecedented as shown below.

The 10 year chart below shows how much the relationship between the S&P and gold ebbs and flows (variability in bottom pane).

Some events such as quantitative easing and a weak USD drive both stocks and gold higher, therefore the two will be correlated at times. Fundamentally the two assets remain vastly different and more often than not will move in opposing directions.

Referring back to graph 2 in this article one can see the dramatic decline of stocks and rise of gold in late July/early August 2011. The point we are trying to make is that there is no hard and fast rule dictating the relationship between gold and the U.S. stock market. The relationship is as dynamic as the market itself.

The correlation between gold and the S&P in a 12 month period over the last eight years is as follows:

What is very interesting to note is that out of the last eight years, gold has exhibited the only negative, and second strongest overall relationship with the S&P 500 over the last 12 months. This reinforces the view that gold is most definitely a safe haven asset, now more than ever.

Note: The positive relationship observed in the last 10 weeks is insignificant, relative to the overwhelmingly negative relationship over the majority of the last 12 months. This is why the annual correlation statistic still shows such a strong negative relationship, in spite of the positive trend over the last 10 weeks.

We see tremendous upside in gold. The global economy is very poor, there is no argument to the contrary. We see two possible actions by central banks in response to the current situation. One response is to do very little – let the invisible hand deal with the mess and hopefully all sorts itself out eventually. The other is further intervention which may or may not help the situation, depending on what form the intervention takes. Inaction will result in further deterioration in the global economy, and consequently gold rises due to safe haven demand. Further intervention/easing is also bullish for gold as explained in previous articles.
Stocks and gold are not the only assets that rise during periods of easing.
The graph below shows the run up to, and start of QE2 on November 12th 2010. Plotted are gold, copper, light crude and the S&P 500. The relationship is remarkable. All these assets followed each others movements very closely.

Although all these assets are unique and have vastly different fundamentals, under certain conditions, they trade in the same manner. Many factors determine the price of gold, stocks and all other assets. However under certain circumstances, as we have seen, they can and will move in the same direction.
The conclusion is that although assets may have very different fundamentals, under certain conditions they can trade in the same direction.
One of the factors that all assets, whether they be bonds, stocks, gold, oil or what have you have in common is their sensitivity to monetary policy and because an easing in monetary policy is bullish for all these aforementioned assets, they can all trade together when the market is focused on easing. When attention is not on the direction of monetary policy, the correlation between commodities/gold/stocks breaks down and the traditional fundamentals return as the major determinants of their respective prices.
As already mentioned, gold and stocks exhibited a positive relationship during QE2. Both assets rose, but for different reasons. Equities rose due to the anticipated improvement in economic conditions. Employment and consumer spending were expected to rise, as a result companies were likely to see a rise in future profits and hence their current value increased.

Gold rose during QE2 as more US dollars were printed, the less those USD were worth, and the more gold (essentially another currency) was worth relative to the value of the USD.

Had economic conditions improved for some other reason, such as higher than expected employment statistics from organic growth in the economy, the stock market still would risen and gold likely would not have. What we can infer is that monetary easing is one of the infrequent circumstances that gives rise to gold and the S&P tracking positively.

Statistics 101 – Correlation does not imply causation. Even though there has been, and will continue to be, periods where gold and the stock market are positively correlated, the fundamental analysis points towards gold still being the safe haven hedge it has always been.

We continue to believe that the current market environment is supportive of higher gold prices. We trade gold using options on GLD, which can be traded as easily as any other stock option. Using options allows us to tailor our position to match our view, enabling us to place trades that are not simply speculating that gold will go up or down. To find out how options could add more versatility to your trading portfolio please visit www.skoptionstrading.com. Our subscribers receive regular market updates, detailed trading signals and a model portfolio with specific suggested capital allocations to each trading recommendation. Our full trading record can be viewed on our website.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.
Bob Kirtley Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules