07 May 2020
To the extent that gold is viewed as a safe-haven asset when equity markets fall, there is typically an inverse relationship between gold and equities. However, this week’s Chart Room shows the correlation of the two assets’ returns has done an about-face in recent weeks, turning sharply positive since the March selloff across risk assets. Gold and stocks fell together in mid-March as liquidity in the financial system dried up and investors dashed for cash. Then in April, gold rallied with equities as central banks injected significant liquidity and pledged to essentially do whatever it takes to maintain healthy funding conditions.
When gold and equities become positively correlated, it usually signals a market regime driven by liquidity and changing real yields, such as the current environment. We also saw this positive correlation amid the aftermath of the 2008 financial crisis, the height of the euro debt crisis in 2011-12, and during a period of rising real yields in 2018.
A positive correlation with stocks could also mean lower diversification benefits from holding gold in a multi-asset portfolio. Having said that, we still hold a positive view on gold over the medium term as it can hedge against the potential risk of currency debasement given the significant scale of fiscal and monetary stimulus.
It is also worth noting that returns from gold producers lagged those of the actual metal in March, but recorded a sharp catch-up in April and have now delivered a similar return as the gold price year-to-date. Despite the weakened diversification benefit, gold hasn’t lost all its lustre.
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