Gold Climbs With Stocks During Bull Markets

Among the many attractions of gold, from a financial perspective, is the fact that it often increases in value when stocks rise, as well as when they fall.

The precious metal is universally valued for its ability to protect an investment portfolio against the risk that stocks may plunge. The deeper equities sell off, the greater is gold’s negative correlation with the stock market since investors typically move into gold as a safe haven.

But history shows that gold also rises with stock prices. This is particularly so when share prices climb in anticipation of lower interest rates, as occurred on August 22 when Federal Reserve Chairman Jerome Powell in a speech at the Fed’s annual Jackson Hole conference indicated that the central bank is open to cutting interest rates. This was what stock investors—and gold investors—had been hoping for—and what President Trump has been pressuring the Fed to do. Stocks soared, the Standard & Poor’s 500 Index jumping 1.5 percent, while the Nasdaq Composite and the Dow Jones Industrial Average leaped 1.9 percent, as gold climbed more than one percent to top $3,400 an ounce. Lower interest rates increase the attractiveness of gold, which, of course, does not offer a yield.

History shows that gold has a positive correlation of .54 with the S&P 500 Index during the strongest stock market rallies, meaning gold has risen, on average 5.4 percent for every 10 percent gain in the stock index.  

In short, gold delivers the best of both worlds— protecting investment portfolios when stocks sink, and adding to gains when shares climb. This unique performance reflects the fact that gold is an investment, a consumer product, and an industrial material. The wealth effect resulting from higher stock prices supports consumer and industrial demand for gold, as well as investor demand for the precious metal as protection against inflation. Nothing else offers investors such a full rage of downside protection and upside potential as gold.