Typically, gold and the stock markets exhibit a significant inverse correlation. Sure, on some occasions the two will trend in the same direction for a short time; but in general investors are drawn to one or the other given economic and market conditions. Of late, gold and the other precious metals have decidedly gotten the better of their counterparts in equities.
The logic behind the inverse dynamics between precious metals and stocks deals with two main factors: the market sentiment of the public and the effect of interest-rate policy.
When investors lose confidence in the economy and the country’s prospects for growth, they generally “get out of stocks.” In response, they also usually search for so-called safe haven, and precious metals are uniquely positioned to serve this purpose.
In addition to offering portfolio diversity in the form of a tangible asset that is outside of the orbit of the financial system, physical precious metals are generally seen as a safe store of wealth during times of economic upheaval.
Since the calendar turned to 2016, investors have taken a more bearish attitude toward Wall St. January saw stock indices in the U.S. give up more than 10% of their value. Although the Dow Jones Industrials and S&P 500 have since recovered on the back of two months of successive gains, there are other troubling signs in the equities markets.
According to Reuters, “Net outflows from equity funds almost tripled from the week before, soaring to $16.9 billion—the largest exodus since September, when investors fled stock markets after China’s surprise devaluation sent global markets into a tail spin.” By comparison, investors fleeing for safety poured $5.6 billion and $1.7 billion into government bonds and precious metals, respectively, over that period.
The situation is equally unsettling overseas. Comparable equity funds in Europe tacked on to their 13-week losing streak with $2.8 billion in outflows, its worst run since February of 2008. In Japan, $800 million flowed out of equities for the sector’s eighth straight week of losses. In addition, emerging market equities lost a half-billion dollars.
Near-zero and even negative interest rates around the world also play a role in precious metals gaining at the expense of equities. Stocks have been benefiting from the low-rate environment throughout their 7-year bull market run, at which point rates are typically supposed to rise in order to cool off a market heated up with “easy money”; unfortunately, because economic growth has been so low in spite of the stimulus from monetary policy, the fuel for this bull market is virtually exhausted.
The benefactor of this unwinding of the bull market in stocks have been precious metal funds and miners. The SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV), a pair of major ETFs backed by precious metals, have seen year-to-date gains of 20% and 25%, respectively. Meanwhile, the largest silver streaming miner, Silver Wheaton Corp. (SLW), has seen its share price surge nearly 100% from trough to peak since late January.
Wall St was down again on Friday morning while the precious metals were trading in the green to close the week.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.