Gold Price & Overall Market Correlation: How it Works?
Gold Price & Overall Market Correlation: How it Works?
By:Kai Zeng
Has gold become positively correlated with the market or does it still serve as an effective hedge?
Recently, gold prices have been trending in the same direction as the overall market. This raises a question among traders: Has gold become positively correlated with the market, or does it still serve as an effective hedge against market risk?
To find an answer, we analyzed the correlation between gold, represented by the exchange-traded fund Gold ETF (GLD), and the S&P 500, represented by S&P 500 ETF (SPY), to see how these relationships have changed over time.
Post-pandemic, the correlation between gold and the S&P 500 has more frequently been positive. Currently, the correlation stands at 0.25, with a four-year average of 0.16. Both figures fall within the range of low to non-correlated.
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When extending the timeframe to 20 years, the correlation between gold and the S&P 500 is 0.00, indicating no correlation at all. Even during significant market crises like those in 2008 and 2020, their correlation remained close to zero. This suggests that while gold may not be ideal for hedging against market downturns, it is excellent for portfolio diversification.
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Besides Gold, it’s essential to consider other precious metals such as silver (SLV), platinum (PPLT) and copper (CPER). Over the past three years, the correlations between these metals and the S&P 500 have been low. Gold and silver exhibit the highest correlations in this group, while copper shows low correlations with all the others.
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This trend persists over a 20-year period, further confirming that precious metals generally have minimal correlation with the overall market. This makes them useful for diversification.
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In summary, gold and other precious metals, like silver, platinum and copper, generally have minimal correlation with equity markets. That makes them less effective as hedging tools but excellent for portfolio diversification. Among these metals, gold and silver tend to have a high correlation with each other, while copper shows low correlations with all the others. This low correlation with the overall market holds true over both short-term and long-term periods, making precious metals valuable for reducing risk through diversification.
Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1
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