How Does Gold Perform When Stock Markets Crash?
Wednesday, 8/07/2024 14:15
Black-n-Blue Monday repeats gold price history so far...
STOCKS took a beating on Monday, gold less so,
writes Adrian Ash at DppsVault in this note first shared with Weekly Update
subscribers amid that day's equity-market slump.
We'll leave other pundits and analysts to guess at the "why" behind the almighty Black Monday slump in Tokyo (
how about higher interest rates and a soaring Yen)...
...or the deepening slide in Chinese stocks (
real-estate crash, mountains of bad debt, vanishing GDP growth)...
...plus the sudden panic in European and American shares (
the Fed is late to the fast-coming recession, just like it was late to inflation 3 years ago).
But for the broader sense of an ending in the long boom for US equities, try the words "Warren Buffett".
Data published last weekend said the ancient Sage of Omaha slashed his holdings of over-priced gadget-brand Apple in half between April and June, taking profit at new record highs in AAPL as part of a $76 billion switch from stocks to cash, now at a record-high level for the Berkshire Hathaway money he runs.
Buffett and his team clearly think they know something. And in a proper financial crash, "All correlations go to 1" as old-time traders like to put it...
...meaning that when trouble really hits the fan, everything slides together.
Most times, that includes gold.
Time to panic?
"Gold is behaving exactly as it should," said bullion-market specialist Rhona O'Connell, now at brokerage StoneX amid Monday's stock sell-off.
"[This is] normal...There has been liquidation in the face of equities weakness.
"Clients often ask why this happens, given that gold is supposed to be an insurance policy.
"The answer is that it’s doing exactly what it should and providing comfort in times of trial, but then recovering."
Put another way, global stocks on Monday lost more than 5% from the same point last month on the MSCI World Index. Gold, in contrast, continued to show a 2% gain at the start of London trade.
So when leveraged traders checking their phones at breakfast (whether at home or on the beach) saw margin calls pouring in from their brokers ahead of the New York opening, it forced them to liquidate winning positions to cover their losses elsewhere.
This isn't unusual. Indeed, it's how most equity crashes have played out historically.
Oh sure, gold jumped on Black Monday 1987, adding 3.2% as New York's Dow Jones index sank by more than 1/5th in one session.
But that gain, like that equity plunge, was pretty unique.
The more common pattern in a stock-market crash is for gold to drop as equities sink. But it falls less and from higher ground before finding its floor sooner.
No promises of course. But that's exactly how Black-and-Blue Monday '24 has played out so far.
Take the collapse of Lehman Brothers in September 2008 for instance. Gold gained 10% that week. But the loss of a major investment bank...
...taking with it pretty much all credit and leverage in financial markets everywhere...
...then saw gold sink by more than 20% over the following 4 weeks as US equities dropped by 22%.
"That's it, gold doesn't work!" shouted some pundits.
"Clearly gold is being suppressed!" shouted others.
But no. Gold did exactly what short-term traders needed it to do...
...offering a deep and liquid market in which to raise urgent cash.
More importantly,
gold did exactly what investors would want it to do to, if only they took a breath (and a Valium)...
...rising across the longer-term to offset the grinding long-term losses in the stock market.
Day-to-day, the price of gold shows pretty much no correlation with or against the stock market.
Half the time that stocks go up or down, gold goes in the same direction.
Week-to-week, the same picture. Stocks and gold have gone in the same direction exactly 50% of the time over the past 5-and-a-half decades.
Pulling out to look at 52-week periods, gold has diverged from equities a little more often...
...zigging when the stock market zagged 55% of the time since 1969.
But that split narrows back to less than 51% of the time when we look at the price change across all 5-year horizons, which is what our chart does above.
What changes, however, is the net effect across those 5-year periods. Because while gold has very often shown a strong 5-year gain at the same time as the S&P500 has risen, it has ALWAYS risen from 5 years before when the S&P fell.
To repeat (with a little nuance) and repeating
a clear pattern of gold prices vs. the US stock market we have noted many times before:
Across the past half-century, the S&P500 price index has shown a 5-year rise in 2,130 weeks.
In 1,341 of those weeks, gold also showed a 5-year rise...gaining when the US stock market gained 63.0% of the time.
But when the S&P500 had fallen from 5 years before?
That happened in 549 weeks. And in only 11 of them did gold also fail to show a gain from 5 years before.
For reference, that 'fail' came in mid-2002, when the US stock market was still mired in the DotCom Crash...trading as much as 17% lower from mid-1997. Gold was meantime struggling with the generational lows it made in the late 1990s when European central banks dumped the stuff (because, you know,
history had ended). So it was trading as much as 6% lower from a half-decade before.
That fail aside? On a weekly basis, gold has traded higher when the US stock market fell from 5 years earlier 98.0% of the time.
Not guaranteed to work, in short. But pretty darned close when you need investment insurance to pay out.
Meantime, take a breath, and check
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