Gold and a rising stock market

While it’s been a tough year for equity market investors, the last month has been more rewarding, with the ASX 200 up by almost 9%. This recent rally has many wondering if the worst of the equity market correction is behind us, and if markets will continue to head higher between now and Christmas, and indeed into 2023.

Views on the likely direction of the equity market often influence investors as regards their gold and other precious metal holdings.

And while gold is trusted as a safe haven, and an asset that can be relied on when other markets are falling, its role in a portfolio during periods the stock market is rising is often overlooked. Indeed, some commentators would argue that if the stock market is going to rise, it’s a bad time to own gold.

We think investors should question that view, and would note that

• historical analysis shows that gold often rises alongside a rising stock market

• gold often outperforms other traditional safe havens like cash and bonds in periods the stock market rises

• while we can all have a view on where the stock market, or property prices, will head next, no one can know the future with certainty

• Gold’s role as a portfolio diversifier has stood the test of time, irrespective of broader market conditions

How does gold perform when the stock market is up?

Investor trust in gold as a safe haven is well founded, as not only does it have a multi-millennia track record of storing wealth, but it also has a strong track record of outperformance in the time periods the stock market falls, or when inflation remains persistently high.

One myth that this leads to is the notion that gold is only a safe haven asset, and that unless you think the stock market is going to fall, or that inflation is going to rise, it’s a dead weight in your portfolio.

This is not accurate.

What does the data show?

At ABC Bullion, we’ve analysed more than 50 years of US market data, from 1971 through to the end of June 2022.

Our findings demonstrate that gold more often than not rises when the stock market rises (just over 50% of the time on a monthly and rolling 3-month basis, and 57% of the time on a rolling 12-month basis).

Gold has also on average delivered positive returns when the stock market is rising, irrespective of whether we look at monthly, rolling 3-month, or rolling 12-month returns.

This can be seen in the table below.

USD gold price and US stock market (S&P 500) price returns when the stock market rises – 1971 to 2022

Source: ABC Bullion, London Bullion Market Association, investing.com

The table also shows that the performance gap between stocks and gold falls over longer time periods.

While gold has only generated 19% of stock market returns in months stocks rise (0.6% for gold vs 3.4% for stocks), gold generates 28% of the return stocks do in rolling 3-month periods stocks rise, and 59% of the return stocks do in rolling 12-month periods stocks rise.

How about Australian investors

These findings are just as relevant for Australian investors. Gold has not only delivered positive returns when the stock market rises, but it has also outperformed other traditional safe havens like cash and bonds in such environments.

This can be seen in the table below, which shows for example that gold delivered average gains of 10.2% on a rolling 12-month basis in periods equity markets were rising. Bonds and cash only delivered gains of 8.9% and 7.1% respectively in those periods.

Australian asset class returns when the stock market rises  1971 to 2022

Source: ABC Bullion, London Bullion Market Association, RBA, Global Financial Data

Like the US based analysis, the share of the stock market return that gold has historically delivered increases the longer the time period, with gold generating 49% of the stock markets return in rolling 12-month periods stocks rise.

Takeaway for investors

The data highlights that gold tends to do well when equity markets are rising.

And while gold has historically underperformed the stock market in such periods, if you already hold a meaningful allocation to equities in your portfolio, as many investors do, then you’ll benefit from the rising stock market through that allocation.

It’s also important to remember that gold is typically being held as a part of a diversified portfolio.

By definition, certain asset classes (sometimes gold, sometimes stocks) are going to go through periods where they underperform other asset classes, and others where they outperform.

As highlighted at the start of this blog piece, gold clearly comes into its own during periods of high inflation and/or stock market weakness.

This, combined with the fact that gold does tend to rise when stocks do, helps make it a very useful strategic asset.

As a final point, it’s worth noting how low real interest rates remain today, which is captured in the following chart.

Source: @LouiChristopher (via Twitter)

Real bond yields also remain negative and may remain so for much of the next decade.

As such, these traditional safe havens are unlikely to be able to provide the protective portfolio qualities investors have relied on for most of the last four decades.

This only reinforces the potential role for gold in a well-diversified portfolio going forward.

Warm regards,

The ABC Bullion Team

Disclaimer: This document has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this document or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it. Although the information and opinions contained in this document are based on sources we believe to be reliable, to the extent permitted by law, ABC and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances. To the extent possible, ABC, its associated entities, and any of its or their officers, employees and agents accepts no liability for any loss or damage relating to any use or reliance on the information in this document. It is intended for the use of ABC clients and may not be distributed or reproduced without consent. © Australian Bullion Company (NSW) Pty Limited 2020.