What is Gold’s Effect on Stocks?

Yesterday, gold cracked $700 an ounce for the first time in 25 years. The Dow Jones, however, didn’t seem to mind. The index is now less than 100 points away from an all-time high.
I looked at the correlation between the price of gold, using the StreetTRACKS Gold Shares ETF (GLD), and the S&P 500.
Over the last 369 trading days, gold has risen on 208 days and fallen on 157 days (four days were unchanged).
If you total up all the days when gold rallied, the S&P 500 climbed 12.51%. On days when gold fell, the S&P 500 dropped a measly -0.46%.
So is higher gold good for stocks? Well, not exactly. We don’t have enough evidence to say that. Sometimes you can have your facts right, and still draw the wrong conclusions. Of course, we could easily turn this around and ask if higher stocks are good for gold.
I looked at the data a little more closely, and I was surprised to see that the positive relationship between higher gold and higher stocks is very recent.
In fact, before October 27, 2005, the relationship was the opposite, although very slight. On the 128 days when gold rose, the S&P 500 lost 3.07%. On the 107 days of higher gold, the S&P 500 added a small gain of 2.66%.
But on October 28, everything changed. Since then, on the 80 days of rising gold, the S&P 500 is up 16.06%. That’s over 60% annualized. On the 50 days of lower gold, the S&P 500 has lost 3.04% (over 14% annualized).
The cause and effect picture is still fuzzy, but one thing seems clear. The two markets have become more aligned.

Posted by on May 10th, 2006 at 7:17 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.