Gold is often viewed as a proxy for the entire commodity sector. This is probably due to its long history as a store of value and the fact that it is the most recognizable of all the commodity markets (with the possible exception of oil). Looking into the past, we can confirm that major trends in the price of gold have either led to or coincided with major trends in the entire commodity group. Furthermore, Gold often tends to change direction before other commodities. That’s probably due to its stronger link to the Dollar- Gold and the Dollar tend to trend in the opposite directions.
# Gold and Dollar Correlation
One way to incorporate intermarket analysis is to compare the chart action of two related markets. First, one simply compares their direction to see if they’re following the normal intermarket pattern. Recall that a falling dollar is bullish for gold. If gold is starting to rise, the first thing to do is to determine if the dollar is starting to drop. The next thing to do is to look at the separate charts of each market to determine the importance of their respective trend changes. A minor trend change in one may not justify a major change in the other. Their respective trend signals should be of similar magnitude.
In the current economic crisis caused by COVID-19, you can see that at the same time that the dollar was breaking down, the price of gold was achieving a bullish move of its own in the other direction. Furthermore, Gold rose above its 2011 peak near $1920, which put bullion at the highest level in ten years. A ten-year high qualifies as a major event in any market. An upside breakout occurs when the price of a market rises above a previous peak. The further back in time the previous peak is, the more significant is the upside breakout.
GOLD ETF Chart from June ‘20 to 05, October ’20.
Dollar Currency Index Chart from June ‘20 to 05, October ’20.
The emergence of commodity‐related exchange‐traded funds (ETFs) over the last decade has made investing in gold and other commodities much easier for the average investor and has also contributed to the growing popularity of commodities.
# Gold and Stock Market Correlation
There is a historical tendency for gold prices to trend in the opposite direction of stocks. Gold is considered to be a hedge, a safe haven against a falling stock market. It doesn’t matter if the threat to stocks is coming from inflation (like the 1970s) or deflation (like the 1930s). The fact is that gold is tied to the stock market—but as an alternate investment. Gold prices peaked in 1980 and were in a bear market for nearly 20 years. Stocks bottomed during 1982 and were in a bull market for those same 20 years. In other words, the 20-year bull market in stocks coincided with a 20-year bear market in gold.
The figure below compares the 20-year trend of a rising stock market to a falling gold price from ’81 to ’03.
One would like to see this Gold-Stocks correlation also in the current economic impact from COVID-19, but that isn’t the case. If we look at the S&P 500 Index from June ’20, we can see a major breakdown that ended on March 16, ’20. Gold didn’t suffer as much as the Stock Market did, but it did plunge.
Furthermore, the stock market’s sharp incline after March 16 would imply that gold was supposed to move lower, but that didn’t happen either – and gold has risen to all-time high.
S&P 500 Index from May ’20 to 09 October, ’20.
GOLD ETF Chart from June ‘20 to 05, October ’20.
It can be explained by a few reasons. One is that central banks bought financial assets in their attempts to push economic activity, which caused stock prices to rise, but didn’t eliminate the fear of real economic crisis. As mentioned, when there is a fear of economic crisis – commodities, lead by gold, are the ones to earn the most.
# Gold Mining Stocks Vs. Gold
The GDX is an ETF that includes a basket of precious metal stocks. Although it includes some silver stocks, most of its holdings are gold companies. Gold mining stocks are usually market leaders when the price of gold is rising. But, although the direction of gold has a big impact on the direction of gold mining stocks (and vice versa), a change has occurred in their relationship since 2008.
Mining stocks are generally trending in the same direction as bullion, but they’re usually rising at a much slower pace than the commodity. One of the reasons that gold stocks have lagged behind bullion since 2008 may simply be the fact that miners are stocks. While it’s true that they’re tied to the price of gold, and benefit from rising gold prices, they’re also common stocks. As a result, they’re influenced by the direction of the stock market. They suffer when the stock market is weak. That may explain why mining stocks fell so much further than the commodity during 2008. It may also explain why gold stocks underperformed gold during 2011 in what was an unusually volatile year for the stock market, plagued by European debt problems.
The Market Vectors Gold Miners ETF (GDX) offers exposure to gold and silver shares, which are closely tied to the trend of gold and silver.
# Gold isn’t Like Other Commodities
Gold doesn’t always act like other commodities because of its additional role as an alternate currency. Gold isn’t just the world’s strongest commodity. It’s also the world’s strongest currency. Gold is also viewed by many as an alternate currency. In other words, global traders (and some central bankers) buy gold when they lose confidence in paper currencies. Gold’s historic role as a store of value makes it especially attractive when other assets look unattractive (or relatively unsafe). That includes paper currencies. That helps explain why gold doesn’t always trade in tandem with other commodity markets. That’s why gold has done much better than other commodities during periods of dollar weakness and dollar strength.
# Invest in Gold
- It seems plausible that investors and central bankers have turned to gold as a hedge against global debt problems and economic weakness around the world.
- Gold’s role as a currency has also increased its appeal at a time when paper currencies have become less desirable.
- The emergence of gold ETFs has also made the commodity more easily accessible to investors and institutional traders.