Gold is normally considered a diversifier to stocks, but in the first quarter the yellow metal was trading a bit more in lockstep with equities than usual.
Being an alternative asset, gold usually has a low correlation to stocks. The World Gold Council notes over the past 10 years, the average correlation of gold with U.S. equities and short-term cash bonds has been close to zero. But that wasn’t necessarily the case in the past few months.
Particularly in February when stock market volatility spiked, gold and stocks sometimes rose and fell together. One example was after the release of the February unemployment report showing rising wage growth. That news worried investors that the Fed would hike rates, sending bond yields higher and stocks and gold down. Yet other times, when inflation talk circulated the market, the two assets would sometimes rise. The correlation wasn’t constant or exact, but enough for investors on both sides to take notice.
Is the recent tighter correlation an outlier, or a sign of things to come? So far this year gold is modestly outperforming the broader market, with the SPDR S&P 500 Trust (SPY) exchange-traded fund down 1 percent through the first quarter, and the SDPR Gold Trust (GLD), the largest gold ETF by assets under management, up 1.73 percent.
Sean Lusk, director of commercial hedging for Walsh Trading, says two things helped propel stocks and gold together in the first quarter: the reflation trade and a weaker dollar. Talk of higher inflation supported many commodities, gold included, and a little inflation supports stocks, too. The dollar weakness also gave gold a lift. Being denominated in dollars, anytime the greenback softens it usually supports the yellow metal.
George Gero, managing director at RBC Wealth Management and a veteran gold trader, concurred. Gold doesn’t always have to have a low correlation to equities.
“Gold is a misunderstood asset,” he says. “Gold responds more to inflation in the longer term.”
He adds that gold had been out of favor of late because the stock market had been so strong.
“People did not need gold as an inflation hedge or safe haven,” Gero says.
No one is calling for runaway inflation, which is when gold really outshines stocks. But Lusk says with the volatility in stocks in the first quarter, and the talk of trade wars with the White House issuing steel tariffs and tariffs against China, attitudes toward gold may be changing.