Does Gold Follow or Counter the Market?

There are many reputable analysts and traders who stand by the logic that precious metals act as a counter balance to the equities market. However, in 2017 we saw that even as the stock market continued to rise, so did gold and silver. Looking back on 2017, gold and silver had double digit gains returning 14%.

Sean Williams wrote about the positive correlation that gold and silver have to a rising stock market. Below is an excerpt from his article “This Could Drive Gold and the Stock Market to All Time Highs.”

Here’s why gold and the stock market could both hit all-time highs

Gold is typically viewed as a safe-haven investment when uncertainty abounds or economic growth has slowed. It also tends to do well when the U.S. dollar is weakening. Conversely, stocks do well when the economy is running on all cylinders; and generally, when the economy is doing well, so is the U.S. dollar. The two investment would appear to be polar opposites, as the recent FactSet data implies.

However, there’s a wildcard factor that could lead both gold and the stock market to head higher: near-record-low global yields.

Think about this for a moment: Investors are buying gold usually due to fear, uncertainty, or lack of a better investment opportunity. If there was a way to generate a near-guaranteed 5% yield through bonds, we’d likely see little interest in gold. However, the opportunity cost of forgoing government bonds in favor of gold is incredibly low at the moment. Buying U.S. Treasury bonds, U.K. Gilts, German Bunds, or Japanese government bonds, would lead to a return that would underperform the current rate of inflation, resulting in real money losses. Low opportunity costs caused by low yields should precipitate continued interest in the shiny yellow metal in the years to come.

While stock markets typically like rising interest rates, since it’s a signal of a growing economy and the Fed’s efforts to stave off inflation, low lending rates have given growth stocks a real chance to shine. Businesses have been able to hire at an exceptional rate, merger and acquisition activity in high-growth industries, like biotech, has soared, and it’s all been fueled by cheap and available capital. As long as yields remain low, businesses will be enticed to borrow, which can lead to hiring, acquiring, and even improved shareholder yields via buybacks and dividends. This is a recipe for higher stock prices.

It’s not often we see a strong correlation between gold and the stock market, as the historical data tends to suggest indifference, but the recipe is there for both to soar to new heights.

After sifting through all of this information, I found that it is not all that uncommon for both gold/silver and stocks to do well at the same time. One factor that I believe causes this is quite simple. When stocks are high, investors hedge their bets in case markets turn sour, yet also continue to pour money into the markets with the hopes of an extended run. Investors are also waiting for a pullback of 5% or more before they hit the exits. Bearing in mind, we have not seen a 5% pullback for nearly 500 days. That happens to be the 2nd longest stretch in history.

Ari Wald, Head of Technical Analysis at Oppenheimer & Co., confirmed this in a 2016 report.

With the help of a historical analysis dating back to 1998, Wald reported that “when silver outperforms, over the next 12 months the S&P is up on average 11.5 percent; when gold outperforms, the S&P is only up 6.5 percent.”

He continued, “We would view silver’s outperformance as a signal that investors are embracing risk again… it confirms our view that we think the S&P 500 is setting up for new highs over the next coming months.”

Wald had no idea how right he really was. The S&P hit all new highs over 50 times in 2017.

After researching the strategic tactics of many analysts, I found one common thread: gold. Whether or not they believed the market was going to continue to rise, they were investing in gold — either as a hedge or with the belief it would follow the climb.

It doesn’t matter what side of the fence you find yourself on; most intelligent traders see the value in gold. Properly educate your clients on why and how to protect themselves by investing in gold and silver. With marketing materials, up-to-date research, and extensive experience, we can be your greatest resource in growing and protecting your clients’ wealth.

Reach out to us today.