A reader asks:
What’s the story with gold these days? My understanding is that in times of peril gold is where people go. In the most perilous times in the last ~5 years I feel like the price of gold really didn’t do anything. It wasn’t the hedge that most people associate with it. Can you thread the story of the stock market, interest rates, and gold. Is gold no longer a good hedge against market turbulence? Make it make sense.
Markets don’t always make sense.
That’s part of what makes them so interesting. Investing would be easy if it could be solved with simple if/then formulas. Unfortuately, it doesn’t work like that. Markets are constantly evolving, investors are constantly learning and no two environments are ever the same.
Things that have never happened before happen all the time.
For instance, look at the trailing one year returns for gold and the S&P 500:
They’re both up around 40% over the past 12 months. This almost doesn’t seem possible.
Take a look at the history of rolling 12 month returns1 for both gold and stocks going back to 1970:
These two assets rarely trade in lockstep, which is one reason so many investors like gold as a diversified asset.
I could find just one instance over this 55-year window when both stocks and gold were up as much as they are today simultaneously–when gold was up 49% and the S&P 500 was up 39% in the 12 months ending November 1980.
It is important to note that gold is not necessarily negatively correlated with the stock market. In fact, there is basically no correlation over the long haul. The correlation of monthly returns is essentially zero, meaning one set of returns doesn’t really impact the other and vice