Gold: A Risk Asset Except When It Isn't

Includes: GLD
by: HiddenLevers

By Vivek Dasari and Raj C. Udeshi

Have you seen the adverts for the GLD gold ETF floating around on SeekingAlpha and the finance rags?

GLD adverts from SPDR
(Click to enlarge)

The guys over at SPDR seem pretty confident that gold is “generally not tied to the ups and downs of Wall Street.” Have these guys been around for the past two years? Gold and the S&P have been marching up the same rocky hill.

So are the guys at SPDR making stuff up? SPDR based their claim from StyleADVISOR research, which found that gold and the S&P 500 have a -0.06 correlation over a 10-year data set ending in October 2010.

SPDR’s investment advice stems from data that is almost a year old. The market is dynamic, and recent data still suggests that there is a positive correlation between gold and the market.

Some may still argue that gold and the market could be moving upwards independently of one another, so lets go over why each one has been steadily rising. As the first round of QE kicked in at the beginning of 2009, the market switched into “recovery mode.” The rapid influx of cash into the market gave large companies the capital they needed to dig out of the recession. So if QE sparked the market’s bull run, then what caused gold to rise during this same time period? QE caused the dollar to devalue, and inflation-concerned investors marched into gold and other precious metals. Therefore, it’s not a surprise to see the market and gold moving together during the QE policy.

Using HiddenLevers charting tools, you can get a visual of how actual gold prices (not the GLD as proxy) and the S&P 500 moved during the QE policy. Try the custom dates feature to see the exact QE dates. (QE1: 14-Dec 2008 – 30-Mar 2010. QE2: 01-Nov 2010 – 30-Jun 2011):

The SPDR promoters claim that gold is an effective hedge against the market. During the past two years of Quantitative Easing, gold has been a risk asset – where the market went, gold followed. But not all is lost. These advertising monkeys might be right soon. As the debt ceiling crisis resolves, which it undoubtedly must, gold and the market will part ways. The S&P 500 will take a celebratory jump, and gold will see a mini-crash, as the safe harbor will be ignored for riskier assets. But don’t give the SPDR marketing team too much credit – even a broken clock is right twice a day!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.