Is gold a safe haven investment compare to S&P500

In a previous post I have examined the correlation between crude oil price and S&P 500; now let’s take a look at the relation between spot gold price and S&P 500 and whether the changes in the stock market trend linearly correlated with spot gold price.

Why this question is interesting?  Many consider that investors pushed their money away from financial markets (e.g. stock market) as the uncertainty level in it rises and into commodities mainly gold. This is how most analysts explain the sharp rise in gold prices in recent years. If this paradigm is correct then we should see a strong, consistent and negative correlation between spot gold price and S&P 500 – as the S&P500 declines gold prices rise, since gold is considered a substitute investment instrument to the stock market.

Let check this hypothesis:

Stock market trend in recent years – S&P500

In the following chart are the changes in S&P500 index and the average weekly volume on a monthly basis over the years 1998-2010.

S&P 500 volume and index 1998-2010

The chart clearly shows that in the last couple of years there was a rise in the volume mainly in 2008, while the S&P500 index declined precipitately. Also note that in 2009-2010 there were mainly increases in the S&P500 index.

Spot gold price and S&P500

The following chart compares over the years 1998-2010, gold prices and S&P500 on a monthly basis, while both indexes were normalized to 100= January 1998.

 

S&P500 & Gold Charts

gold charts and S&P 500 1998-2010

The graph shows a steep rise in gold prices since mid 2005 compare to S&P500 index.

The graph doesn’t enable us to draw any conclusions regarding the correlation between the two indexes; only that gold was very close to S&P500 until 2005 (percent change wise of course not the actual price) and even during the dot com crazy at the turn of the millennium S&P500 rose much more than gold prices did.

Let’s examine the correlation between the two indexes:

Correlation spot gold price 1998- 2010 with S&P 500

The chart above examines the correlation of monthly percent change of spot gold price and S&P500 for each year between 1998 and 2010.

The chart shows three aspects:

  • During 1998 and 2004 there was a strong positive correlation between the two, while in 2009 there was a strong negative correlation.
  • During 1999-2002 there was a medium negative correlation between the two indexes, a correlation that subsided in 2003.
  • In the rest of the years there was very little to no correlation between the two indexes.

The total correlation for the entire period was -5.2%, a very weak negative correlation.

What can we make of the abovementioned findings?

  1. Very weak correlation: spot gold price and S&P500 over the last twelve years showed a very weak correlation;
  2. Inconsistence correlation: the two indexes don’t show a consistent and linear correlation over the years, as in some years there was a positive relation, while in others a negative or no correlation;
  3. Sharp rises: During 2009-2010 both S&P500 and gold prices rose (spot gold price increased much more than S&P500) and yet in 2009 there was a negative correlation between the two, while in 2010 a very weak correlation.
  4. Rise in market volume: There is a rise in recent years in the market volume traded (S&P500) as seen in the first chart above.

These findings suggest that investors didn’t give up on the US financial markets such as S&P500, as there were recorded rises in its index and in its volume, mainly in 2009-2010 – the years when gold prices soar; These rises in the S&P500 happened despite the economic slowdown in the US, and the steps the Fed taken which might have weaken (time will tell) the US dollar during those years (e.g. Quantitative easing 1 and 2).

Thus there isn’t necessarily a tradeoff between investing in gold and investing in stock market. It could be that the investors of gold diverted their funds from other sources of investment. This last sentiment is worth exploring in a future post.

 

For further reading (in this site):

5 comments for “Is gold a safe haven investment compare to S&P500

  1. Josh
    February 23, 2011 at 1:16 am

    This is clarifies a lot. I wonder if silver shows the same pattern.

  2. admin
    February 23, 2011 at 8:21 am

    Hi Josh,

    Thanks for your comment.

    I didn’t check it (perhaps I will dedicate a post for this issue), however since gold and silver are very well correlated at nearly 0.7% (see here in The tightening of Silver & Gold prices)

    Therefore, if we to examine the relation between SNP500 and Silver, it will probably show similar relation as with gold and SNP500.

    Lior

  3. jlmuza
    September 22, 2011 at 11:08 pm

    I am also wondering what a correlation chart between the US Dollar and Gold would show. I have got the impression lately that finance reporters talk as much about gold as a “safe haven currency” as a commodity.

    Secondly gold versus US Treasuries. Which is the “real” safe haven?

    • September 23, 2011 at 2:55 am

      Hi Jlmuza,

      Thanks for your comment.
      Your question is very good and I think it should be discussed in a post and not just in a comment.
      I will post about this issue over the weekend.

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