Gold Falls in Correlation with Foreign Markets

[powayseller]

On May 8, the foreign markets started their 15% – 20% one-month dive.

GLD joined them, but fell only 10%. The S&P500 fell about 5%.

Look at this chart, and you see VEIEX, Vanguard Emerging Markets Stock Index Fund charted with GLD, gold.

I thought people flee to gold as the stock market goes down. Or do they flee to gold only when the US stock market goes down?

Investors fled
VEIEX (Emerging Markets Index Fund)
VEURX (European Stock Index Fund),
VPACX (Vanguard Pacific Stock Index).
These three index funds are correlated with gold, rising and falling together over the past year.

Falling less than the foreign markets and gold, were these:
VISGX (Small-Cap Growth Index)
VISVX (Small-Cap Value Index)
S&P, Nasdaq, and Dow

Can I make a very simple conclusion from this data? Gold is correlated with all markets, but more linked with foreign stock markets.

So much for people selling gold because the dollar is going up or inflation is going down?

[lewman]

I wouldn’t base it on such a short observation period. These asset classes just happened to rise together in the past year. Take the late 90s as an example and you’ll see that equity markets foreign or domestic were generally having a good run while gold was going nowhere but south.

Having said that, Gold’s inverse relationship with USD is more probable as it’s considered by many as a “currency” and there’s a fundamental argument that they should be negatively correlated. And keep in mind that even this relationship breaks down from time to time. During most of 2005 when gold continued its up trend, the USD traded higher compared to most major foreign currencies.

[labear]

I don’t think you’ll find daily correlations between gold and the stock market.
In my opinion gold is in a short term downtrend, but the long term bull is very much alive.

[Anonymous]

Chris Johnston

There is no historical correlation between stock and gold prices. I have researched this ad nauseum. In fact, during some of the largest stock declines in history, gold has actually dropped. Look at 1987. If there was a relationship, I would have incorporated it into my trading systems.

Brief periods of correlations, do not make up a fundamental relationship. For it to be legitimate, it needs to stand the test of time.

[powayseller]

Chris, if gold went down during some of the largest stock declines in history, then that is a correlation.

Gold doesn’t have to move with the stock market every time, but it does so at least sometimes.

This shows that gold is not the save haven that people like to say. I can’t tell you how sick I am of reading that gold when up because investors sought the safe haven of gold in response to this or that. Usually the story is the market is fearful of inflation or falling stocks, so they hide in gold.

For this relationship to hold true, it must always be counted on. Well, last week it wasn’t.

Investors/speculators dumped stocks AND gold.

Even though inflation is up, and Bennie said it was too high for comfort, gold went down.

All this tell me that nobody really knows what makes short term moves in gold.

[Author]

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