What Can We Learn From Gold’s Relationship to Other Assets?

At a Glance

  • Gold prices have risen 278% over the past 15 years, a period where it has drawn even or outpaced some other key assets
  • Real interest rates, the biggest factor influencing gold, will likely remain low even once the economy improves

Gold typically does not trade in tandem with the stock market and often the two have a negative correlation.  Gold is supposed to act as a safety net when markets decline and vice versa.  Gold’s peak in the last two decades came during the Great Recession in August 2011, and the low over that period came in 1999 prior to the dot-com bubble.

In the 2020 environment, with negative growth and negative real interest rates, gold has shined.  Year to date it increased over 13% as of mid-May.  Over the same period, the S&P 500 index declined over 9% and the Dow Jones Industrial Average (DJIA) declined about 15%.

However, when comparing the performance of gold vs. the stock market over time, there is a notable difference depending on the time period being analyzed.  Over the past 30 years, the price of gold has increased by almost 280% and the DJIA has increased by 800%.  If we shorten the time frame to the past 15 years, gold has increased by 278%, almost exactly the same as its 30-year timeframe.  But, the DJIA has increased by only 170%.  If we go back 100 years, stocks have far outpaced the price of gold.

Interest Rates

Interest rates historically are a major factor affecting gold prices.  Typically, when rates rise, gold prices suffer.  This is because gold doesn’t pay interest or dividends and interest-bearing investments are more attractive. The fall in global interest rates over the last few years, including U.S. 10-year rates near historic lows, has also helped propel gold higher.

The average annual rate of return on investment grade corporate bonds over the last 100 years is over 5%.  Over the last 30 years, corporate bonds have returned approximately 450%, a 60% greater return than gold over the same period.  Over the last 15 years however, the return has been comparable.

Home Prices

Unlike the historical correlation between equity/bond markets and gold, the change in home prices compared to the change in the price of gold does not have a direct correlation.  While real estate and gold are each tangible assets and can both be used to hedge inflation risk, they do not tend to move together.

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U.S. Dollar

However, changes in the price of the U.S. dollar can dramatically affect the value of gold since gold is denominated in dollars.  Typically, a strong U.S. dollar is negative for gold prices since it makes gold more expensive for investors and governments of other countries purchase gold using their own currencies.  If the U.S. dollar weakens, gold becomes less expensive for purchasers using foreign currencies and can push prices higher.

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Gold’s rally over the last year may continue as real interest rates, the biggest factor influencing gold prices, should remain supportive, even when the global economy improves.

The Federal Reserve has all but rubber stamped an extremely accommodative interest rate environment and has signaled that even solid growth will not lead to interest-rate hikes this year. If COVID-19 continues to disrupt the global economy the price of gold will likely continue to rise. However, monitoring other markets can sometimes give us an idea about where gold could be headed.

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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