Precious Metals Decouple from Stock Market
By Jordan Roy-Byrne
Friday, 21 December 2012
At the end of July we wrote an article examining the relationship between gold stocks and general equities. We sought to understand the huge variance in performance between the two markets. Sometimes they trended higher together. Sometimes the gold stocks surged while conventional equities fell into a bear market. Both markets have endured bad bears at the same time. Is there any rhyme or reason to why such variation?
Here was our conclusion:
What can history tell us going forward? The key is the correlation. If gold stocks are trending higher with the equity market into a potential recession and bear market, then the gold stocks would remain positively correlated over the intermediate term. However, we can see that if the gold stocks are in a cyclical bear while the broad market is nearing a trend reversal or while the economy is nearing recession, then the gold stocks will remain negatively correlated. This is evident in three of the four previous examples.
Interestingly, two of those instances occurred during the second half of the 1960-1980 bull market. The equity market (Dow) is in blue while the Barron’s Gold Mining Index (BGMI) is in red.