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How the Trump Trade Fear Is Moving Precious Metals

PART:
1 2 3 4 5 6 7 8
Part 2
How the Trump Trade Fear Is Moving Precious Metals PART 2 OF 8

Did the Fall in Equities on May 17 Help Precious Metals?

Haven or not?

Most of the equity markets ended on a negative note on Wednesday, May 17, 2017. The Dow Jones Industrial Average fell approximately 372 points. The S&P 500 Index (SPX) (SPY) fell about 1.8%, and the Nasdaq Composite fell almost 2.6%. Both the Dow and the S&P 500 suffered their worst percentage falls since September 9, 2016.

The rise and fall of equity markets have a considerable impact on precious metals. Stock markets are considered risky assets, and assets such as gold and silver are regarded as havens. As the risk appetite of investors increases, the demand for equities may also increase. However, when the risk appetite falls, the demand for precious metals can surge.

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Since the markets are speculating about the Trump trade issue, implications for various assets are different. Equities slumped on Wednesday, which gave a boost to precious metals.

During increased risk in the markets, some investments become less desirable, and investors assume gold will give them some breathing room. However, this doesn’t always hold true, and investors can get burned.

However, it’s interesting that gold’s 12-month correlation with the S&P 500 over the past 45 years averages zero. So whether gold is a haven asset or just a teaser remains a mystery.

Correlations

Since 2005, the SPDR Gold Shares (GLD) has had a correlation of 0.14 with the S&P 500. Correlations vary from 1.0 to -1.0, with 1.0 indicating that two securities move in the same direction, -1.0 showing that they move in opposite directions, and 0.0 indicating no correlation at all.

Typically, stocks have a high negative correlation with the US dollar. However, gold has an inverse relationship. The US dollar tends to rally when equities are weak, thus putting downward pressure on gold. That can make gold and its related stocks move in the same direction as the dollar instead of the opposite.

Gold-based stocks such as Eldorado Gold (EGO), Kinross Gold (KGC), B2Gold (BTG), and Alamos Gold (AGI) mostly follow the gold market’s returns rather than the overall stocks market’s returns.

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