Effective diversifiers are sometimes hard to find. Many assets become increasingly correlated as market uncertainty rises and volatility is more pronounced, driven in part by risk-on/risk-off investment decisions. As a result, many so-called diversifiers fail to protect portfolios when investors need them most.
Gold is different in that its negative correlation to equities and other risk assets increases as these assets sell off (Chart 6). The GFC is a case in point. Equities and other risk assets tumbled in value, as did hedge funds, real estate and most commodities, which were long deemed portfolio diversifiers. Gold, by contrast, held its own and increased in price, rising 21% in US dollars from December 2007 to February 2009. And in the most recent sharp equity market pullbacks of 2020 and 2022, gold’s performance remained positive.
Chart 6: Gold becomes more negatively correlated with stocks in extreme market selloffs
Gold becomes more negatively correlated with stocks in extreme market selloffs
Correlation of US stocks versus gold and US stocks versus US Treasuries in various environments of US stock market performance since 1994*
Gold becomes more negatively correlated with stocks in extreme market selloffs
Correlation of US stocks versus gold and US stocks versus US Treasuries in various environments of US equity market performance since 1994*
*As of 31 December 2023. Correlations based on weekly returns in US dollars
for ‘stocks’: S&P 500 Index; ‘US Treasuries’: Bloomberg Barclays US Treasury
Index and ‘gold’: LBMA Gold Price PM since January 1994 due to availability of US Treasury data. The top bar corresponds to the respective correlations when the S&P 500 weekly returns rise by more than two standard deviations. The middle bar corresponds to the respective correlations when the S&P 500 weekly returns are between two standard deviations (or ‘σ’), while the bottom bar corresponds to the respective correlation when the S&P 500 weekly returns fall by more than two standard deviations. The standard deviation for the S&P 500 is calculated using weekly returns over the full period.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer
*As of 31 December 2023. Correlations based on weekly returns in US dollars for ‘US stocks’: S&P 500 Index; ‘US Treasuries’: Bloomberg Barclays US Treasury Index and ‘gold’: LBMA Gold Price PM since January 1994 due to availability of US Treasury data. The top bar corresponds to the respective correlations when the S&P 500 weekly returns rise by more than two standard deviations. The middle bar corresponds to the respective correlations when the S&P 500 weekly returns are between two standard deviations (or ‘σ’), while the bottom bar corresponds to the respective correlation when the S&P 500 weekly returns fall by more than two standard deviations. The standard deviation for the S&P 500 is calculated using weekly returns over the full period.
This robust performance is not surprising. With few exceptions, gold has been particularly effective during times of systemic risk, delivering positive returns and reducing overall portfolio losses (Chart 7).
Chart 7: The gold price tends to increase in periods of systemic risk
The gold price tends to increase in periods of systemic risk
Stocks, bonds and gold during various crises*
The gold price tends to increase in periods of systemic risk
Stocks, bonds and gold during various crises*
*As of 31 December 2023. Return computations in US dollars for ‘Global stocks’: FTSE All World Index; ‘US Treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM. Dates used: Black Monday: 9/1987 - 11/1987; LTCM: 8/1998; Dot-com: 3/2000 - 3/2001; September 11: 9/2001; 2002 recession: 3/2002 - 7/2002; global financial crisis (GFC): 10/2007 - 2/2009; Sovereign debt crisis I: 1/2010 - 6/2010; Sovereign debt crisis II: 2/2011-10/2011; Brexit: 23/6/2016 - 27/6/2016; 2018 pullback: 10/2018 - 12/2018; 2020 pullback: 31/1/2020 - 31/3/2020; 2022 pullback: 1/2022 – 12/2022.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer
*As of 31 December 2023. Return computations in US dollars for ‘Global stocks’: FTSE All World Index; ‘US Treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM. Dates used: Black Monday: 9/1987 - 11/1987; LTCM: 8/1998; Dot-com: 3/2000 - 3/2001; September 11: 9/2001; 2002 recession: 3/2002 - 7/2002; global financial crisis (GFC): 10/2007 - 2/2009; Sovereign debt crisis I: 1/2010 - 6/2010; Sovereign debt crisis II: 2/2011-10/2011; Brexit: 23/6/2016 - 27/6/2016; 2018 pullback: 10/2018 - 12/2018; 2020 pullback: 31/1/2020 - 31/3/2020; 2022 pullback: 1/2022 – 12/2022.
But gold’s correlation does not just work for investors during periods of turmoil. It can also deliver positive correlation with equities and other risk assets in positive markets, making gold a well-rounded efficient hedge (Chart 8).
This benefit arises from gold’s dual nature: as both an investment and a consumer good. As such, the long-term performance of gold is supported by income growth. Our analysis bears this out, showing that when equities rally strongly their correlation to gold can increase. This is driven by a wealth effect supporting gold consumer demand, as well as demand from investors seeking protection against higher inflation expectations.
Chart 8: Gold performs well in the recovery periods following a systemic selloff
Gold performs well in the recovery periods following a systemic selloff
Performance of gold and Treasuries from the market trough (bottom) to the market recovery point (stock market levels before the systemic selloff)*
Gold performs well in the recovery periods following a systemic selloff
Performance of gold and Treasuries from the market trough (bottom) to the market recovery point (stock market levels before the systemic selloff)*
* As of 31 December 2023. Return computations in US dollars for ‘US Treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM. Dates used are based on the end dates of Chart 7. Post Black Monday: 11/1987 - 6/1989; Post LTCM: 8/1998 - 11/1998; Post dot-com: 3/2001 - 5/2007; Post 9/11: 9/2001-11/2001; Post 2002 recession: 7/2002 - 11/2004; Post GFC: 2/2009 - 1/2013; Post sovereign debt crisis I: 6/2010 - 10/2010; Post sovereign debt crisis II: 10/2011 - 2/2012; Post Brexit: 6/2016 - 7/2016; Post 2018 pullback: 12/2018 - 6/2019; Post 2020 pullback: 3/2020 - 7/2020.
** The bar is truncated for the Dot-com bubble recovery due to its extreme differential between others and visibility. Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer
* As of 31 December 2023. Return computations in US dollars for ‘US Treasuries’: Bloomberg Barclays US Treasury Index; ‘gold’: LBMA Gold Price PM. Dates used are based on the end dates of Chart 7. Post Black Monday: 11/1987 - 6/1989; Post LTCM: 8/1998 - 11/1998; Post dot-com: 3/2001 - 5/2007; Post 9/11: 9/2001-11/2001; Post 2002 recession: 7/2002 - 11/2004; Post GFC: 2/2009 - 1/2013; Post sovereign debt crisis I: 6/2010 - 10/2010; Post sovereign debt crisis II: 10/2011 - 2/2012; Post Brexit: 6/2016 - 7/2016; Post 2018 pullback: 12/2018 - 6/2019; Post 2020 pullback: 3/2020 - 7/2020. ** The bar is truncated for the Dot-com bubble recovery due to its extreme differential between others and visibility.
