Precious Metals: Correlations With Stocks And Bonds

Includes: GLD, PALL, PPLT, SLV
by: Marius Bausys


Precious metals appear to have relatively low correlations both to equities and fixed income, making them efficient diversifiers in traditional portfolios.

GDXJ is the most correlated ETF with 3 of 4 precious metals.

It is not easy to find funds negatively correlated with precious metals.

Precious MetalsIn my recent article "Comparing Precious Metals ETFs" I reviewed risk parameters of the physically backed funds tracking four main precious metals: gold, silver, platinum and palladium. This time I would like to extend the analysis a bit further by identifying equities and fixed income ETFs that are most and least correlated to these metals. This exercise will hopefully give investors a better feel for how each specific metal behaves.

For the purpose of the analysis, I am using the largest by assets physically backed non-leveraged ETFs: SPDR Gold Shares (NYSEARCA:GLD) for gold, iShares Silver Trust (NYSEARCA:SLV) for silver, ETFS Physical Platinum Shares (NYSE:PPLT) for platinum and ETFS Physical Palladium Shares (NYSEARCA:PALL) for palladium. To identify equities and fixed income ETFS most and least correlated to precious metals, I have put the four ETFs in question through the correlation analysis check up on InvestSpy. Only the funds with minimum $1 billion of AUM and 5 years of trading history were taken into the account. Utilizing 5 years of daily data, the summary of results looks as follows:

Source: InvestSpy

The table above provides a few interesting insights:

  1. There are equities ETFs for each precious metal with at least 0.50 correlation to it. Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) turns out to be the most correlated equities ETF with GLD, SLV and PPLT. Only PALL is most correlated to iShares MSCI Canada ETF (NYSEARCA:EWC) with a coefficient of 0.50, although even in this case GDXJ comes as a close second with 0.47.
  2. It appears that there are no equities ETFs that would have a more significant negative correlation with any of the precious metals. Only SPDR S&P Bank ETF (NYSEARCA:KBE) has a slightly negative correlation with GLD (-0.07). Nonetheless, a range of equities ETFs are little correlated to precious metals, thus diversification benefits are still achievable.
  3. Analyzing fixed income ETFs, SPDR Barclays International Treasury Bond ETF (NYSEARCA:BWX) is the most correlated fund to GLD and SLV, whilst Market Vectors J.P. Morgan EM Local Currency Bond ETF (NYSEARCA:EMLC) moves closest with PPLT and PALL. However, even the most correlated bond ETFs do not exceed correlation readings above 0.40.
  4. Similarly to equities, there are no fixed income ETFs that would have significantly negative correlations with precious metals. Only iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) has a more substantial negative reading of 0.22 in the case of palladium, which is the most correlated precious metal to stocks and hence its inverse relationship with bonds.

Summing up

Precious metals' correlations with stocks and bonds appear to be generally low across the board, thus they can be efficient diversifiers in traditional equities/fixed income portfolios. When your view on any of the metals turns bullish, it may be a welcome addition to your portfolio.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.