Price of gold and US stocks set new all-time highs ahead of the Fed...

 

The PRICE of GOLD is famously uncorrelated with the stock market, offering investors a simple way to diversify an equity portfolio by adding a little bullion to help spread their risk, writes Adrian Ash at BullionVault.

 

But that non-correlation – meaning that gold shows no relationship with the stock market, moving neither together with nor against the direction of equity prices over longer time frames – only works as an average. 

 

At any point in time, gold tends to be either negatively correlated against the direction of equity prices – a negative gold correlation often seen when the stock market slumps – or positively correlated with it. And at the start of September, the price of gold in US Dollars was more positively correlated with the US stock market than almost any time in 4 decades on a 1-month basis, and more closely connected on a 1-year basis than any time since spring 2011.

 

Here comes the science...!

 

 

Measured on the 'r' coefficient of day-to-day movements over a 1-month period, gold began September with a correlation of +0.945 against the S&P500 index.

 

This was the most positive 1-month relationship since February 2010 (when it read +0.947) and close to the strongest link since September 1982 (+0.966). That number would read +1.000 if gold and the stock market were moving absolutely in lock-step with each other, or minus 1.000 if they moved exactly opposite day by day. Over the past half-a-century, the 1-month correlation has averaged +0.004.

 

Gold has also become extremely correlated with US stocks on a 12-month basis, with that 'r' coefficient reaching +0.897. That's close to the top 1% of all 365-day readings over the past half-a-century, and it's the most positive connection since mid-May 2011.

 

Again, this longer-term relationship averages near to zero (+0.020 since 1969). So gold and the stock market will need to diverge at some point, to help the long-term average remain close to zero.

 

This is already happening on the 1-month correlation of gold and the stock market, and it fell to +0.693 at the start of this week. But the 1-year relationship is less volatile, and correlations as extreme or stronger than today have a tendency to run for extended periods of time...

 

...34 trading days in a row in spring 2010, for instance, or 25 days in spring 2004 and 67 days in mid-1971.

 

 

So far in autumn 2024, it has run this high for only 9 trading days in a row so far. So for better or for worse, next week's Federal Reserve decision and forecast for US interest rates will very likely see the underlying direction of gold and the stock market remain joined at the hip for a few more days if not months to come.

 

Of course, both equities and the price of gold have since last summer shrugged off the highest interest rates in two decades. They have now jumped to new all-time highs in anticipation of the Fed finally joining New Zealand, Canada, the ECB and Bank of England in starting to cut the cost of borrowing from next week. But while a quarter-point cut is now the consensus prediction for the Fed's September decision, both assets could suffer a pullback if the US central bank's new forecasts for how deeply it will cut rates by Christmas and in 2025 then disappoint market expectations.

 

Those expectations currently foresee the Fed's key interest rate standing at 4.3% by the end of 2024 and just 2.9% by end-2025. But the central bank's policy team itself forecast 5.1% and 4.1% in their June 'dot plots', raising both predictions from the outlook they gave in March at 4.6% and 3.9%.

 

So there's scope for disappointment in both the stock market and gold around next Wednesday's new Fed forecasts. Not least because everyone – and I mean everyone in gold-market analysis and punditry – is now shout-out-loud bullish gold because of the Fed rate cut now guaranteed to arrive on 18 September.

 

But beyond that? Any pullback is likely to find a warm welcome among private investors, offsetting the caution in gold demand caused by the past year's mix of high prices and high interest rates. And for anyone trying to balance risk and growth across a spread of different investments, it would offer a chance to buy gold as a hedge against longer-term falls in the stock market – a scenario looking increasingly possible as weaker US jobs data plus the shifting US yield curve points towards an economic recession.