How does the Stock Market Affect Gold Prices?
This question has been asked since the inception of stock markets a little over 400 years ago. Since that time, investment options have only become more diverse and sophisticated. Our goal in this essay will be to discuss the relationship between gold and the stock markets. We will be comparing the larger stock markets like the Dow Jones, S&P 500 and London FTSE. We will not include secondary markets such as Sydney, Toronto or Vancouver as these have a large number of mining-related listings, which tie those markets more directly to the price of gold and other precious metals.
For millennia precious metals were influential instruments for measuring wealth. Then in 1602, The Dutch East India Company issued the world’s first IPO, or initial public offering, in Amsterdam. The Dutch East India Company mainly traded in spices and other Asian agricultural commodities, principally from what is now called Jakarta, Indonesia. Their IPO marked the birth of modern investment as we know it today.
As stock exchanges opened throughout the world, the number of traded stocks also grew. In concert, global investment knowledge also developed, especially for those who did their homework, rewarding investors with increased portfolio values.
However, it wasn’t (and isn’t) as simple as just buying stocks and waiting to collect your profits. Stock markets have many factors that affect individual stocks and the exchanges on which they are traded. These can range from local trading laws, regional or corporate rivalries, geopolitical influences to acts of God. As an example, consider how many wars have been fought since 1602 and their general effects on the markets of their times. More specifically, should a company like the Dutch East India Company lose a large number of produce-laden ships en route to Amsterdam in a storm (an act of God), this would adversely affect their profits and market value.
Confusion over the Inverse Relationship
Gold and the stock market are often said to have an inverse relationship. Just what does this mean? Generally, as the stock market rises, gold will not go up and may even retreat. The opposite can be said for a time when the gold is rising, and stocks are stagnant or falling.
Investors tend to look at underperforming assets and move them into ones that have a better potential for increased returns.
The keyword is this relationship is risk. In riskier investment environments, gold is often seen as a safe harbour against the unknown. In times of economic prosperity, investors are prepared to accept more risk for the prospect of greater profits.
The investment world’s herd mentality drives the overall risk sentiment in the markets, both gold and stocks. An analogy for this would be the wildebeest migration across Africa. The herd has to get to greener plains, or it will starve to death. Along the way, there are rivers to cross filled with hungry crocodiles. The herd is so big that most will make it across. However, there are enough crocodiles that many will not make it across.
If you are a wildebeest, how do you approach the river from a risk assessment point of view? Do you say you want to be first in before the crocodiles realize what is happening? Do you go in the middle of the herd hoping you won’t be targeted by a hungry mouth? Or do you wait to be the one of the last to cross, hoping that the crocodiles will have had their fill and leave you be?
Some investors are more risk-averse than others – wanting to play it safe – while others are comfortable trading in markets or products that inherently more volatile. Should any of these investors rely on the notion that Gold and the Stock Market trade at an inverse relationship?
Gold And Stocks In The Time Of Covid
In the final weeks of 2019, information started to filter out of China about a new coronavirus outbreak in Wuhan. Few people paid attention to it at first, but then everyone became aware of its spread as it moved across the globe. So let’s revisit what happened to both gold and stock markets as the planet went from a time before Covid to our current situation. To get a better understanding, we will look at the monthly price movements of gold and the Dow Jones Industrial Average (DJIA) for evidence of correlation. Our study will start in December of 2019 and run through to May of 2021.
It was the last time the markets and the world would see normal trading conditions. December trading is often a moment when many traders square up their ledgers for end-of-year accounting. In addition, some traders liquidate their positions so that there are profits registered for the year.
Gold opened the month at $1464, and at the end of the month, it closed at $1518.
The DJIA opened at 28,105 and finished off the month and year at 28,569.
We can see there was no inverse correlation between the markets this month.
The new year and new decade started with rumours of a medical event in China. Market participants began to pay attention to news stories and statements from the Chinese government. It became apparent rather quickly that there was a big disconnect between the two. When that happens, the markets get nervous, and when they get nervous, they get volatile. Things were about to get very volatile.
Smart money began to flow into gold. It opened at $1519 and closed at $1590.
That money flowing into gold had to come from somewhere, and from the price action, it appeared to come from the stocks. The DJIA opened at 28,577 and finished off at 28,295.
For January there was indeed an inverse price correlation.
By this point, the Covid virus started to jump around the planet, with Italy its first significant victim outside of China. President Trump refused to believe how serious the situation was, dismissing the need to take any preventive measures. There was still a great deal not known about what was happening. One confident impression was that fear was only growing around the globe.
Gold slipped a bit over the month from its opening price of $1,594 to finish off at $1,586.
The DJIA fared worse, sliding from an opening price of 28,232 down to a month-end level of 25,547.
Both markets fell so no inverse correlation this month.
By this point, the panic was being felt in many parts of the world, even as in the US, hoping to instill calm, the Trump administration claimed it would all pass very quickly. Instead, turmoil in the markets was possibly most volatile this month.
Gold opened the month at $1,592. It trades as high as $1,703 and as low as $1,451. By month’s end, it was able to get close to its opening price by finishing at $1,578.
The DJIA suffered an equally volatile trading month. Opening at 25,128 and its high for the month quickly began to suffer significant losses falling as low as 18,182. Specific industrial sectors such as the airlines and cruise ships sought financial assistance from Washington. They got it. By month-end, the DJIA had clawed its way back to 21,836.
Again both markets suffered losses, so no inverse correlation again.
In April, global fear was rife, and governments were stepping up with stimulus packages as lockdowns took hold and day-to-day commerce ground to a halt. The business was booming for Amazon and food delivery services, while the rest of the retail world shuttered their doors.
Gold rallied from its open of $1,578, as high as $1,748, before settling at $1,687 for the month.
The DJIA panic selling abated, and bargain hunters returned to the market. Opening at 21,841, it shed a few points down to 20,635 before rallying up to 24,905. It ultimately closed the month at 24,388.
Both markets had strong rallies, so once more, no inverse correlation.
The world was beginning to come to terms with what was happening. Different countries were taking varying approaches, and some were having success, while others were not. Nevertheless, the combination of fear and stimulus meant that both markets had reasons to continue their upward movement.
Gold opened the month at $1,690. It fell briefly to $1,671 before getting as high as $1,763. It closed out the month at $1,763.
The DJIA also moved higher over the month, opening at 24,143. After initial stumbling down to 22,788, it was able to have a strong rally as high as 25,845. However, markets held most of these gains with a month-end price of 25,505.
Once again, the markets did not have an inverse price correlation.
Markets remained volatile in June but still managed to close to the upside after initial losses early on. The northern hemisphere came to terms that there would be a summer under lockdown. Global infection numbers and deaths showed no sign of abating.
Gold opened at $1,738 and then sold off, hitting a low of $1,670. Note the May low was $1,671. It climbed as high as $1,786, having a strong close at $1,781.
Again the DJIA followed a similar track as gold had done. Opening at 25,279 it retreated down to 24,563. From there, it had a strong move up to 27,637 before slipping back to close the month out at 25,772. Not as strong a close as gold, but still a close to the upside.
Both markets closed in positive territory, again, disputing the inverse price correlation theory.
Price movements were almost entirely to the upside this month for both markets. Fear levels were becoming extreme. The US response to the pandemic was becoming the only narrative discussed relative to the upcoming US election, just a few short months away.
Gold opened at $1,782, only slipping to $1,758. It then went on a tear to $1,986. By the end of the month, it held at $1,977—a very strong close indeed. However, the $2,000 handle was going to prove to be an elusive target to hold.
The DJIA shared a similarly strong upside move in July. An open of 25,780 was met with a slight drop to 25,419. It then surged up to the 27,180 levels before pulling back to 26,439 at the close of the month.
This was yet another month without an inverse price correlation between the two markets.
It would prove to be the end of continuous monthly rises. From this point, forward market volatility wouldn’t be a one-way direction, with August reaching new highs but ultimately unable to sustain them.
Gold started strong at $1,980 and managed to crack the $2,000 level making it as high as $2,075. However, this lofty valuation was to be short-lived as the price then retreated to$1,863. Nevertheless, by month-end, it had almost made it back to its start closing at $1,968.
The DJIA was a different story. It opened at 26,496, slipping slightly to 26,308. After that, it proceeded to have a strong performance reaching 28,813 before settling the month out at 28,445.
For the first time in several months, there was an inverse correlation between gold and the stock market.
The Covid pandemic was still surging in the US and Brazil at this point. The US was trying to work out the logistics of holding an election in pandemic conditions. Market volatility continued to rise, as did the electoral campaign rhetoric.
Gold fell for the second month in a row. It opened at $1,968 and proceeded to fall for the month touching a low of $1,848. However, it managed to recover to $1886 at month-end.
The DJIA saw increased volatility and a loss for the month as well. After opening at 28,408, the index rallied to 29,198 before turning around for a deep sell-off. It went as low as 26,540, yet managed to regain some of those losses by closing at 27,701 for the month.
With both gold and the DJIA having lost months, there was no inverse price correlation.
All eyes were on the US presidential election. Was it going to be four more years of Trump? Or would Biden bring change to the political landscape that had been reshaped drastically during Trump’s tenure in the White House? The world waited with bated breath. Market volatility continued as cash went to the sidelines to await the election results in November.
Gold had a relatively quiet month compared to previous ones. It opened at $1,886, had a high of $1,933, a low of $1,860, before a close of $1,879. A minor loss in the grand scheme could almost be called a flat trading month from its open and closing prices.
The DJIA was also not optimistic that there would be regime change in Washington, still showing volatility and falling on worries that the status quo would remain. It started at 27,748, then rallied up to 28,959. Then it sold off to 26,070, finally closing at 26,548.
With both markets suffering losses, no inverse price correlation was prevalent during this month.
Election month in the US. But the gold and DJIA were divided on the election outcome. Gold sold off, and the DJIA was ecstatic with the result and rallied strongly. The world breathed a sigh of relief that there would not be another four years of American governance via Twitter.
Gold started the month at $1,877 and managed to climb as high as $1,965. After the election, it sold off, dropping as low as $1,764 and closing at $1,777.
The DJIA, on the other hand, took the election results as a sign that long-needed help for the economy would soon be forthcoming from the next administration. Market opening at 26,456, there was a slight drop to 26,291. The post-election high was 30,217, with only a minor pullback to 29681.
Gold and the stock market exhibited an inverse price correlation this month.
The initial market high from the election results was short-lived as Trump refused to acknowledge that he lost the election and the validity of the process. Instead, chaos and fear were to be the hallmarks of his final days in office.
Gold had almost the exact opposite price action from the previous month. It opened at $1,777 and a low of $1,776. From there it started to climb, reaching a high of $1,907. The close of $1,899 was technically vital that it couldn’t hold above $1,900.
The DJIA was still under no illusion about the election results. It opened at 29,685 with only a minor drop to 29,422, before it rallied up to 30,635. It finally closed out the month and year at 30,606.
The events of January 6 proved to be an unprecedented moment in US history. The mob storming of the US capital building left people around the planet wondering what was happening in the US. Until the moment Joe Biden was sworn as President, commentary even went so far as to express doubt that Trump would leave. As a result, the markets had some big price swings before and after Biden’s inauguration, both slipping by month-end.
Gold opened the new month, year and decade at $1,905. After January 6, gold soared to $1,959. Then, after Biden was sworn in, it promptly retreated down to $1,803. By the end of the month, it had crawled back up to $1,848.
The DJIA started in January at 30,596, yet the chaos was too much for it to hold above 30,000. Nevertheless, it managed to get to 31292 before retreating down to 29,860. Finally, it eked out a close of the month at 29,958.
Yet another month where both gold and the stock market did not have an inverse price correlation.
The insanity was now over. Trump retreated to Mar a Lago, and there was someone in the White House that would listen to the public health officials. It was time to start to deliver government again. Finally, after many months there was a sense of optimism.
Gold generally is not a fan of optimism and reacted accordingly. Opening at $1,864, it managed a brief touch of $1,872 before turning to the downside, and it dropped down to $1,717. It only was able to recover to the $1,734 level at month-end.
The DJIA, on the other hand, couldn’t have been happier. Starting at 29,980, it only had the slightest bit of a pullback to 29,661 before going on a tear up to 32,086. By month end it retreated a bit to 30,900.
This month had an inverse price correlation between the two markets.
As sanity began to return to the world, markets slowly reverted to less volatile trading ranges. In addition, Biden announced that an extensive stimulus package would be coming soon.
Gold opened the month at $1733 and climbed up to $1760 before a sell-off took it down to $1677. At month end, it had recovered to close at $1708—another slight loss for the yellow metal.
The DJIA was pleased with the prospects of more stimulus funds becoming available. It opened at 31,020, and had a brief pullback to 30,547. The market then surged up to a high of 33,258 and closed at 33,017 for the month.
Once again, there was an inverse price correlation between the two markets.
The vaccination program in the US was getting into full swing and states we’re starting to prepare to end lockdown conditions so the economy could begin to resume.
Gold had a relatively quiet but negative trading month. It opened at $1,778 and saw a low of $1,758. The high was $1,798 and finished off at $1,769.
The DJIA, still in a feeding frenzy on stimulus news, gapped up on the open to 33,769. Its low was just a touch below this at 33,683. The high was 34,178, and it finished at 33,917.
The two markets displayed the inverse price correlation for another month.
While still a problematic situation globally, the Covid caseload in the US was receding. Other spots on the planet took the focus for the World Health Organization (WHO).
Gold saw physical demand from central bank purchases and resumed economic activity. It opened at $1,769, only seeing a low of $1,766. From that point, it was all up. The high was $1,912, and the close came in at $1,908.
The DJIA, not wanting to feel left out of the party, continued to rally as well. It opened at 33,952. It also had almost no downside action, with the low at 33,920. It got as high as 35,093 before ending the month at 34,456.
This month there was no inverse price correlation between the two markets.
So is there a market effect on the price of gold?
While there may be anecdotal evidence that gold and the DJIA have an inverse price correlation, the price history of the previous eighteen months does not bear this out: there were only six months that bore out the inverse relationship, making it twelve months where they both moved in the same direction.
People that pay close attention to the markets may see intraday movement correlations, yet looking at expanded timelines, especially in periods of extreme volatility, the markets tend to move in tandem.
Traders should be aware of this and not adhere to dispositions that are not based on empirical data. If you choose to use one as an indicator to trade the other, the results probably won’t be what you expect. If you are looking for some thoughts on what the rest of 2021 might bring, check out the following article: https://guardiangold.ca/blog/gold-price-outlook-2021.
Doing your own research is the best way to enter into any trade. Then, plan your trade and trade your plan.
Both markets weigh on the other, yet they are far more intertwined than most people realize. Understanding this dynamic will work to your advantage when deciding when you want to enter and exit markets.