Ever since the first government-sponsored rescue package was thrown at the market in 2009, correlation among asset classes (stocks, commodities, currencies, fixed income) has increased. The terms ‘risk-on’ and ‘risk-off’ were coined to describe markets’ appetite for risk in general. As such, investors have not distinguished much between asset classes, for when risk was on they tended to buy anything from equities to commodities and bonds, whereas during risk-off periods everything was sold off. The level of correlation among assets of course would vary from week to week and could at times even inverse for a handful of months before mean-reverting, but looked at as a whole since 2009, correlation is up from years prior.
Such is also the case when we consider the correlation between stocks and gold. The following chart of the SPDR S&P 500 ETF (SPY) versus the SPDR Gold ETF (GLD) shows the correlation and relative performance of stocks and gold looking back to late 2004. Since the spring of 2009 when markets stock markets bottomed and governments increased their market interference, stocks and gold have traded higher in a relatively tight relationship. Each time stocks and gold deviated too much from each other they eventually came back together.
A closer-up look at the relationship shows that while the S&P 500 has rallied strongly off the recent November 16th low, gold has lagged badly and in fact trades lower than it did on that date. This in and of itself is not very telling because as discussed above, such divergence can last and widen for several months. If we however consider the bullish construction of both the gold chart and that of the S&P 500, it could give us reason enough to look for a tightening of the current spread and a re-coupling of the correlation.
As an aside, the same recent divergence can be seen in Europe when we chart the Eurostoxx 50 stock index versus gold – divergence since early November.
The chart of gold as again analyzed via the SPDR Gold ETF (GLD) remains in an uptrend where dips may get bought. After a significant low in late May the stock had an equally important breakout above resistance in August. After bumping up against resistance near $174 the ETF has corrected but remains constructively positioned for renewed upside.
The S&P 500 too, again looked at via the SPDR S&P 500 ETF (SPY) remains well positioned for further gains through the seasonally strong November – February period. The up-trend since the beginning of the 2011 Santa Clause rally on December 19, 2011 remains in-tact and price resistance near $143 looks susceptible to be broken before year-end.
Given the recent inverse correlation between the S&P 500 and gold, in addition to the bullish setups in both individual charts an outperformance of gold over coming weeks seems a reasonable expectation.