If we consider gold only as protective asset, then it is logical to assume that the gold price and the stock market as a whole should move in different directions. Moreover, the less confidence the stock market gives, the more the interest in gold should grow, and vice versa. Speaking in statistical terms, there should be correlation.
In order to analyze deeper the behavior of gold prices in this context, I've done some research, in which I've considered the dynamics of changes in the correlations between S&P 500 and gold prices.
Each point of the chart below shows the correlation between gold price and S&P 500 over the 90-day period. I used the data from the beginning of 2010 and "R" programming language.
I also interpret some indicators for better understanding of the chart.
As of January 2, 2014, the correlation between gold and S&P 500 over the previous 90 days was -0.839. This means that, over the specified period of time, the variables tended to change in different directions in the vast majority of cases. At the same time, on October 22, 2012, the similar correlation was 0.903, i.e. price of gold and S&P 500 were almost synchronously changing in the one direction.
So here's what I can tell by looking at this intricate curve.
Firstly, the wavelike nature of the correlation changes is obvious. The oscillatory amplitude is approximately 1 year. And, in my opinion, the correlation will be located in the negative zone for the next six months (i.e. gold will be prone to grow in case S&P 500 decreases, and vice versa). Given that, based on last year's experience, the increase in interest rate is inevitable this month, S&P 500 certainly waits for the correction, and, hence, gold will receive support.
Secondly, starting from 2014, the extreme indicators of the negative correlation have been reducing. Until 2014, the negative correlation reached -0.9 in some months, however, starting with 2014, the maximum values have not exceeded -0.6 (i.e. the S&P 500 index growth results in a decrease in the price of gold each time less). In my opinion, this indicates a chronic decline in the credibility of the stock market. In other words, the growth of the stock market is less often seen by the gold buyers as an excuse to sell, and this trend is confirmed statistically.
I know that the dynamics of the stock market is not the only factor influencing the price of gold. There is also the inflation, as well as the value of the dollar. However, if you analyze the situation only in this context, my both conclusions suggest weak prerequisites to further reduction of the gold prices.
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.