Does Gold Work in a Stock Market Crisis?
Jonas Elmerraji, CMT
There are plenty of good reasons to like gold right now. But its utility as a stock market hedge isn’t one of them.
As the S&P 500 closes in on new highs amid lots of economic uncertainty, plenty of attention is being put on gold.
And for good reason – gold is in full-blown breakout territory this summer.
(At the same time, the economics of long-beaten-down gold mining stocks are such that they’re effectively a leveraged bet on gold prices.)
But that doesn’t mean that gold is a safe haven for investors getting anxious about the stock market.
The conventional wisdom has long been that gold is a wise contrarian play to frothy stock market valuations. But that doesn’t pan out in the data.
Looking back at all 15% or worse S&P 500 drawdowns from 1975 through today – times when investors could reasonably feel like stocks were in crisis territory – gold has only “worked” about half the time.
What’s a better investment than gold when stocks are in crisis? Stocks, for one:
The chart above shows average returns of gold vs. stocks following a 15% drawdown in the S&P 500. While both assets initially have a strong positive correlation, that typically reverses strongly about 40 trading days following the drawdown point, and continue to be negatively correlated for about four months.
The stock market's mean-reverting tendencies make it a better absolute bet than gold when there's blood in the streets.
Looking at individual returns 180 days and 252 days (or about one trading year) later, gold returns are left-skewed and lack the fat tails of stocks following a crisis.
That jives with this chart from Verdad Capital that shows gold’s status as the worst of a collection of stock market hedges:
Does that mean you shouldn’t own gold right now? Of course not!
From a trend following standpoint, gold’s price action looks stellar right now.
But it does mean that if you’re allocating to gold in hopes that you’ll have a hedge against stock market risk this summer, then you might be in for an unpleasant surprise if this market does wind up taking a turn for the worse.
It’s a much better idea to decouple gold from your stock thesis in 2020.