By Jodie Gunzberg
Gold is on the rise this year as investors seek shelter from the volatility in the stock and oil markets. While 90-day annualized volatility of oil, around 50%, is the highest since April last year, and is near its 2001 peak, it's not near the high levels of 2008 or 1991. Also, the open interest that usually collapses near peak volatility and oil bottoms continues to be high.
Source: S&P Dow Jones Indices. Bloomberg.
This may indicate there will be further trouble in the oil market, so is bad news. It's not only bad news for oil, but as commodities and stocks have become more correlated, the fear is spreading across all risky assets. Many times when this happens, investors turn to gold, as they are doing now. Just as stocks and commodities are each on the brink of a 10% loss year to date, gold is up 13% in 2016.
Source: S&P Dow Jones Indices.
Given the near-zero correlation of gold to the S&P 500, it makes sense to use gold for diversification, but given its near-30% loss in 2013, viewing it as a safe haven is arguable. However, when the S&P 500 loses more than 10% over 12 months, gold has returned positive 62% of the time, with an average of 2.7%.
Another asset class with near-zero correlation to stocks is real estate. In particular, the S&P/Case-Shiller 20-City Composite Home Price Index that measures the value of residential real estate in 20 major cities in the U.S. has 0.08 correlation to the S&P 500, using monthly data since January 2000.
So, can your home price protect as well as gold in a stock market crash?
It depends where you live, but seven of the twenty cities gain on average during stock declines bigger than 10%. The cities include Boston, Dallas, Denver, Minneapolis, New York, San Diego and Washington, D.C. The home prices gain, on average, 6.0% in Boston and 4.7% in New York, which far exceed the 2.7% gold offers. Washington D.C. and Denver are close seconds to gold, gaining 2.4% and 2.3%, on average, when the S&P 500 loses more than 10% in 12 months.
If you are in Las Vegas, you may be better off betting on gold for safety, as their local housing market loses 7.4% on average, only behind Phoenix, which loses 8.8%, on average, when stocks lose.
Disclosure: © S&P Dow Jones Indices LLC 2015. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor's Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to S&P DJI. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI and to see our full disclaimer, visit www.spdji.com/terms-of-use.