Does Gold’s Correlation with Stocks Mean that it’s No Longer a Safe Haven?
Sunday, December 4, 2011 at 03:12PM
Silver Prices

In this article we examine the current and past relationship between gold and the S&P 500 index and whether or not gold still remains a “safe haven”. In the past gold has often had a low positive relationship with the S&P, with that relationship trending negative in times of economic turbulence (hence gold’s safe haven status) but that trend has not held over the past 10 weeks. We aim to answer the implications this has for gold in the future.

The stock market (by definition) slows and offers low or negative returns in times of economic strife. The modern day response from central banks is to pump (print) money into the economy in a bid to fuel growth or as is the current situation - delay the significant part of the hangover.

The extremely loose monetary policy which central banks world over are adopting is keeping interest rates low. Real interest rates are currently extremely low or negative (which is observed in the US TIPS market) and this is extremely bullish for gold. For new readers, we have covered these dynamics in past articles.

In the current circumstances, some policy actions are bullish for both gold and the stock market. The U.S. economy is faltering and there are no signs of improvement. The Fed’s response is to operate incredibly loose monetary policy to stimulate growth and reduce unemployment. Monetary easing raises the value of gold through devaluation in the USD amongst other reasons.

The desired outcome of loose monetary policy is a boost for the economy as a whole. The equities market is the timeliest and one of the more accurate gauges for the state of the economy. Lower interest rates and an increased money supply (monetary easing) boost the stock market – an elementary economic concept.

What we can deduce is that monetary easing is bullish for gold and the S&P 500. In times of economic strife, the two are likely to be more highly correlated.

 



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