How Strong Is the Correlation between Gold and Equities?


Aug. 1 2016, Updated 8:11 a.m. ET

Gold and equities

Gold prices have been surging since the start of 2016. However, the equity markets have been on a roller coaster ride. As the Federal Reserve gave its verdict on interest rates on Wednesday, July 27, 2016, equity markets struggled for direction. The Fed’s statement could generate hope for the US economy and buoy investor sentiment, but equities weren’t very optimistic.

The S&P Index is depicted here by the SPDR S&P 500 ETF (SPY), which fell marginally by 0.1% on Wednesday. Gold futures rose 0.64%, and silver surged 3% that day.

[marketrealist-chart id=1496404]

The above graph shows a close inverse relationship between equities and gold, as depicted by the SPDR Gold Shares (GLD).

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Correlation with S&P

Gold is a famous haven asset, so it’s often expected to rise during times of turbulence in the equities markets. These two indexes could invariably go in opposite directions. The S&P index and gold have a negative correlation close to 0.21 (-0.21). This suggests that about 21% of the time, gold could move in the opposite direction of the S&P index.

Most portfolio managers start reshuffling their portfolios once equities perform well. During rising turbulence, gold is highly weighed. During stable times, when equities could be on the rise, gold isn’t preferred that much.

A look at gold and equity market performances shows that a falling stock market isn’t necessarily a catalyst for a major rally in gold.


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