# Gold vs stocks correlation is changing



## james4beach (Nov 15, 2012)

I have a correlation calculator tool (in my proprietary system) where I can plug in two symbols and see a measure of the correlation between two stocks. In this context it's the correlation in daily price changes where -1 = perfect inverse, 0 = no correlation, +1 = perfect positive. For example SPY & IVV have 0.999 and SPY & SH have -1.000

Between SPY and GLD:

Correlation since 2009 is 0.520, a pretty strong positive correlation.
Correlation since December 2012 is much weaker at 0.282
And since January 2013 it's -0.033 indicating now very slight inverse correlation of daily price movements. But at that low a value (within +/- 0.1) it's pretty much a zero correlation.

I think this is an interesting change in the behaviour of gold versus the S&P 500! Looking at 2009-today, gold & stocks have had highly correlated daily movements which means they pretty much rise and fall together. This started changing in December. And at the moment, they're more likely to move inversely.

Different story when you look at Canada. Here are the numbers for XIU and IGT which is my proxy for "gold in CAD"

Correlation since 2009: 0.456
Correlation since December 2012: 0.533
since January 2013: 0.729

So in Canada, the change underway is that the correlation between TSX & gold is becoming stronger... probably not a surprise, since we have such a significant metals sector.

But I would say that change with respect to the S&P 500 is much more dramatic because it's a sign change. Thoughts?


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## lonewolf (Jun 12, 2012)

James4beach
Good observation

I think it was most likely elliott wave international years ago that was perhaps the first to point out that everything was moving togeather up or down against the dollar. A deflationary crash accross the board except in the dollar I think will occure in the next couple of years.


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## james4beach (Nov 15, 2012)

Yes I totally agree that everything tends to move up and down together. It's kind of unsettling. The whole world acts as one trade, as they say risk on or risk off.

But interesting to see gold departing from that. I like this a lot, as my portfolios hold gold for hedging and diversification purposes.

Regarding the deflationary crash, I'm not totally certain of that myself. I believe the financial system has become extremely unstable and unreliable (the 2010 flash crash being a prime example) but I'm not sure where it's going. I do agree another period of deleveraging is coming, but I don't know how it will manifest itself due to all the central bank intervention. My general approach is to reduce exposure to volatile markets, which is why I'm only 8% overall exposed to stocks.


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## lonewolf (Jun 12, 2012)

Central banks are no match for social mood @ some point the masses will not want all the bail outs. (tea party movement might be a force to deal with in the future)Trends can become self reversing.

The fed is no match in its fight against all the baby boomers that are past their peak spending years in trying to get them to spend to stimulate the economy. Seams students are are taking on debt though.


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## james4beach (Nov 15, 2012)

I have observed a lot of complacency in the last few years, which makes me think a repeat of 2008 may be around the corner. Look how low the VIX is right now. Or look how comfortable everyone is buying right at a 13 year high! Considering our whole financial system is still on life support right now, and Europe is basically bankrupt, it's very premature to say the troubles are all in the past and it's clear sailing ahead.

There are virtually no bears out there.


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## fatcat (Nov 11, 2009)

james4beach said:


> I have observed a lot of complacency in the last few years, which makes me think a repeat of 2008 may be around the corner. Look how low the VIX is right now. Or look how comfortable everyone is buying right at a 13 year high! Considering our whole financial system is still on life support right now, and Europe is basically bankrupt, it's very premature to say the troubles are all in the past and it's clear sailing ahead.
> 
> There are virtually no bears out there.


you obviously don't read zero hedge :biggrin: ... the world is awash in bears ... bearishness is profitable


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## lonewolf (Jun 12, 2012)

Mutual fund cash levels & or amount of funds in Rydex bullish funds verses bearish funds. I think are 2 of the best sentiment indicators for the united states stock markets.

There not based on opinion but based on where the money is.


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## doctrine (Sep 30, 2011)

Gold is historically slightly negatively correlated with stocks, especially with the S&P 500. Seems like it's a return towards the mean, which is still more negative correlation. I'll take another 2008 though. I have some dividends to reinvest


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## thenegotiator (May 23, 2012)

doctrine said:


> Gold is historically slightly negatively correlated with stocks, especially with the S&P 500. Seems like it's a return towards the mean, which is still more negative correlation. I'll take another 2008 though. I have some dividends to reinvest


a 2008 is a dream come true to any investor.
nevertheless everybody is in the same room right?
why is everyone so bearish now?:02.47-tranquillity:
i really enjoy ur posts Doc.
and of coarse before Harold slices a new one on me .
no pun intended.
i learned something new today with James.
now i ask James.
how efficient is ur analysis in the long run James?

just one thing James i am selling ... not buying.... except my short positions that i am holding.
by the way USD index hit 81.99.
EUR retesting the lows.
if it breaks below 1.2999 it will go a lot lower and i will cash my long USD ETF.
GLTA


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## HaroldCrump (Jun 10, 2009)

thenegotiator said:


> and of coarse before Harold slices a new one on me .


and of *course *Harold is not *coarse*.
No pun taken either


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## james4beach (Nov 15, 2012)

thenegotiator said:


> now i ask James.
> how efficient is ur analysis in the long run James?
> 
> just one thing James i am selling ... not buying.... except my short positions that i am holding.


Hi. Those correlation numbers I calculated are only based on day-to-day movements... they are 1 day correlation measures. This has no relevance to long-term returns or performance of one asset versus another.

It is relevant to figuring out which things are likely to go up or down simultaneously on any given day. For example the stock index and government bonds have quite a negative correlation... on any given day, they're likely to move in opposite directions. This knowledge is useful for designing a portfolio for low volatility, and avoiding extreme price swings in your portfolio (e.g. everything plummets at the same time).

It's * not * relevant to long term performance. It doesn't tell you whether gold or stocks performs better over time.


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## lonewolf (Jun 12, 2012)

The confidence game

When the masses have high confidence in goverment = more goverment bonds being purchased
When the masses have high confidence in the private sector = more stocks being purchased

The above theory I think would most likely be true.


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## james4beach (Nov 15, 2012)

fatcat said:


> you obviously don't read zero hedge :biggrin: ... the world is awash in bears ... bearishness is profitable


I know about zerohedge but that's a very atypical crowd. Check out equity funds net flow data... Michael Ashton wrote on Jan 31, 2013: "The chart above (source: ICI, via Bloomberg) shows the net new cash flows into equity funds, which just happen to be at the highest level over the past three weeks (about $30bln) of any time during the period of data available on Bloomberg."

How can you look at this mainstream investor data and say it's bearish? It's the most bullish in the last few years, throwing aside any doubt and concern about getting into stocks:


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## thenegotiator (May 23, 2012)

james4beach said:


> Hi. Those correlation numbers I calculated are only based on day-to-day movements... they are 1 day correlation measures. This has no relevance to long-term returns or performance of one asset versus another.
> 
> It is relevant to figuring out which things are likely to go up or down simultaneously on any given day. For example the stock index and government bonds have quite a negative correlation... on any given day, they're likely to move in opposite directions. This knowledge is useful for designing a portfolio for low volatility, and avoiding extreme price swings in your portfolio (e.g. everything plummets at the same time).
> 
> It's * not * relevant to long term performance. It doesn't tell you whether gold or stocks performs better over time.


thks for the reply and how do u apply ur correlation.
that is what matters most .


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## thenegotiator (May 23, 2012)

lonewolf said:


> The confidence game
> 
> When the masses have high confidence in goverment = more goverment bonds being purchased
> When the masses have high confidence in the private sector = more stocks being purchased
> ...




and talking about theories there is the one theory that dumb money buys US dollars in times of extreme pessimism.
paradoxically the same USD belongs to the country that everyone says is bankrupt.
hmmm ... lack of where to place ur money is a sad thing is it not?
as for the high masses (herd mentality) buying more stocks = dumbness IMo.
now now .
for the long term investors that buy on dips and weather it out through divvys .. pleaaaaaaaaaase do not rape me after my above quotation.
actually i am sure that many long term investors are already preparing their portfolios for that kind of disaster .... if it becomes one.
i still think that this bull mkt has legs till year end ... up down ... sideways it does not matter how.
i just do not trade that way anymore.

cheers


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## james4beach (Nov 15, 2012)

thenegotiator said:


> thks for the reply and how do u apply ur correlation.


I'm not doing linear curve fitting. For stocks people usually calculate linear regression (r^2 sum of squares etc). This is a simple method and people do it because spreadsheets can easily calculate it, but it's not very good for stocks. Linear relationship like that really doesn't capture the way stocks move.

My tool applies cross-correlation, mostly used with electrical signals. This can be used for arbitrarily shaped waveforms, or in my case, stock charts. The number I calculate is a normalized cross-correlation, with synchronized time (no time shifting), based on daily % changes. I find it does quite a good job and aligns pretty well with what you would see visually by overlaying the two stock charts.

Each sample in the calculation is the day's % change. For instance on a given day if stock A moved +2% and stock B moved +1.5%, that contributes a high score (near 1). If stock A moved -2% and stock B moved +4% that contributes a low score (near -1) due to opposite sign but similar magnitudes. These scores are accumulated over the entire time period... take a look at images of cross-correlation and you can see it graphically.


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## fatcat (Nov 11, 2009)

james4beach said:


> I know about zerohedge but that's a very atypical crowd. Check out equity funds net flow data... Michael Ashton wrote on Jan 31, 2013: "The chart above (source: ICI, via Bloomberg) shows the net new cash flows into equity funds, which just happen to be at the highest level over the past three weeks (about $30bln) of any time during the period of data available on Bloomberg."
> 
> How can you look at this mainstream investor data and say it's bearish? It's the most bullish in the last few years, throwing aside any doubt and concern about getting into stocks:


yes, i know james, their is the usual mad rush to get back in now that things are at a top ... buy high sell low ... who knows ? ... there are lots of "green shoots" out there ... i worry about a) the sequester b) the fed continuing easy money c) the real earnings picture ... can american business "stand on it's own two feet" and 4) does the consumer have enough left over to actually grow the economy instead of just stay even with monthly bills

but i do agree there is the smell money in the air ... let's all get rich in the stock market !


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## james4beach (Nov 15, 2012)

lol exactly let's all get rich in stocks, it's so easy!

Personally I'm most worried that the entire system is still on life support (it needs zero interest rates, constant Fed & ECB stimulus) which tells me it's not healthy at all. Europe is insolvent. American corporate earnings look good, but I fear it's really just because they've been laying off everyone and cutting wages. None of these things offers conditions for sustainable economic growth = bull market.


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## dogcom (May 23, 2009)

James4beach I believe during the 70's was a time that gold and the S&P correlation was very low.


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## lonewolf (Jun 12, 2012)

Sometimes investors will use correlation in one market to predict another market. I think it is best to go straight to the market that you want to trade or invest in & let that market tell you what to do.

Dow theory most of the time is used incorrectly but it has stood the test of time when used properly. It is not based on exact correlation but based if the Transports & industrials are moving up or down togeather.

It has long been written that there is a season for everything or something along those lines maybe the ancients were on to something. There seams to be a strong correlation to prices as the earth orbits the sun in the modern world.


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## dogcom (May 23, 2009)

Finally found a good chart of gold in the 70's and you can easily see the horrendous drop from the high at the start of 1975 and I believe that is when the S&P took off in the other direction. I am not saying that we will repeat the event from back then but you can see how the holders of gold would have been puking everywhere and selling in utter disgust from the low over a year and a half later. After that they would have missed the biggest dollar rise of all from gold from 100 to 800 dollars an ounce. Todays decline in gold is nowhere close to that fall and investors are already starting to puke everywhere. The S&P however can't go down and can only go up and investors can dance in the tulips and enjoy the warm sun and life is good and nothing can go wrong.

We are in real time on this and it is a very tough go as it would have seemed back in the mid 70's.

http://www.safehaven.com/article/28955/rusty-old-tin-can-of-gold


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## doctrine (Sep 30, 2011)

William Bernstein, in the Four Pillars of Investing, recommended a 5% weighting to precious metals (such as gold). That's probably not a bad idea, although I don't follow it. But you would be automatically selling when it was high in value (like for the last few years), and then perhaps if it drops again you'd be adding some. Not a bad idea. I might wait until gold drops below $1k to begin though. ;-)


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## dogcom (May 23, 2009)

I don't see 1000 in gold unless we see the S&P back below 666 or worse. If inflation from money printing is driving up stock prices then gold and silver should follow at some point.


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## Dibs (May 26, 2011)

james4beach said:


> Correlation since 2009: 0.456
> Correlation since December 2012: 0.533
> since January 2013: 0.729


If I am reading this correctly these correlations based on different time windows. For example, from 2009 you are matching 4 years of data whereas since Jan 2013 you are looking at 2 months of data. Can we really make a comparison between the two? Won't there be effects of variance that are due to the size of your data sample? 

Is it possible for you to conduct a similar analysis, but calculate the correlation of a 2 month time window starting 2009 through 2013? It would be interesting to see how stable the correlation is over time in a two month window. It might give us more insight as to how useful your original correlations are.


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## james4beach (Nov 15, 2012)

Dibs said:


> If I am reading this correctly these correlations based on different time windows. For example, from 2009 you are matching 4 years of data whereas since Jan 2013 you are looking at 2 months of data. Can we really make a comparison between the two? Won't there be effects of variance that are due to the size of your data sample?
> 
> Is it possible for you to conduct a similar analysis, but calculate the correlation of a 2 month time window starting 2009 through 2013? It would be interesting to see how stable the correlation is over time in a two month window. It might give us more insight as to how useful your original correlations are.


You point out a valid criticism there. Yes those are different time periods. The "since 2009" is a huge # of days. Much fewer samples in the other numbers. I don't have the time at the moment but yes I think it makes more sense as you say to compare equivalent time windows.

Then again, if you just pull up a SPY vs GLD chart of the last year you'll see how they started breaking apart in the last couple months...


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## fatcat (Nov 11, 2009)

james4beach said:


> Then again, if you just pull up a SPY vs GLD chart of the last year you'll see how they started breaking apart in the last couple months...


we started to see a lot of stories about investors "piling" back into stocks again about 2-3 months ago ... confidence was back ... 

in the last few years when risk was on and equities were up we saw gold go up because everyone is thinking about the inevitable inflation ... 

now, either they are thinking they will pick up inflation protection via equities or they are afraid that bernanke is going to slow and halt qe ... either read is bad for gold ... 

to see them break in different directions is significant ... i think the truth about gold is found in the producers not the metal itself .. and the producers have simply not made the breakout predicted for them for a long, long time ... 

if you want something that is going to sideways for years why not buy a utility or pipeline and at least make 4-5% ?


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## james4beach (Nov 15, 2012)

That's why I only buy the metal itself (or an instrument like CEF.A) instead of the miners. I don't hold any mining stocks.


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## james4beach (Nov 15, 2012)

james4beach said:


> Between SPY and GLD:
> 
> Correlation since 2009 is 0.520, a pretty strong positive correlation.
> Correlation since December 2012 is much weaker at 0.282
> And since January 2013 it's -0.033 indicating now very slight inverse correlation of daily price movements. But at that low a value (within +/- 0.1) it's pretty much a zero correlation.


Following up on this observation I had a couple months ago. The correlation continues to change, along the same lines as before. Gold and S&P 500 are now inversely correlated even more so.

Even though metal investors have been beaten up lately, maybe the good news is that gold no longer correlates with the S&P 500. I personally hope that continues to be the case, because for my portfolio it's much better if gold doesn't just mirror the S&P 500.


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## lonewolf (Jun 12, 2012)

dogcom said:


> Finally found a good chart of gold in the 70's and you can easily see the horrendous drop from the high at the start of 1975 and I believe that is when the S&P took off in the other direction. I am not saying that we will repeat the event from back then but you can see how the holders of gold would have been puking everywhere and selling in utter disgust from the low over a year and a half later. After that they would have missed the biggest dollar rise of all from gold from 100 to 800 dollars an ounce. Todays decline in gold is nowhere close to that fall and investors are already starting to puke everywhere. The S&P however can't go down and can only go up and investors can dance in the tulips and enjoy the warm sun and life is good and nothing can go wrong.
> 
> We are in real time on this and it is a very tough go as it would have seemed back in the mid 70's.
> 
> http://www.safehaven.com/article/28955/rusty-old-tin-can-of-gold


 Lyndsy long cycle in dow

Secular bear low to low 
8/25/21 to 4/28/42  7551 days high with in secular bear 2931 days

Secular bull low to low 7364 days
4/28/42 to 6/26/62

secular bear low to low 7351 days
6/26/62 to 8/12/82 High with in secular bear 3852 days from 6/26/62

secular bull low to low 7517 days
8/12/82 to 3/12/03

secular bear low to low
3/12/03 to ?

3852 days from 3/12/03 low 9/27/13


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