What is the theoretical relationship between Gold Price and Stock Market?
Thanks in advnace for your cooperation.
Theoretically there is an inverse relationship between the stock market and gold prices.There have been circumstances where the stock markets rise and gold prices fall. Gold prices may also rise in sympathy with the fall in stock prices. The reason lies in the perception of the market by investors. Investors who foresee a bearish market, usually take positions in gold futures to safe guard their investments. In the United States sometime in the 1970’s, the economy stagnant causing gold futures to become a more attractive option for investors.
There can be both short-run and long-run relationships between financial time series. Short-run relationship between the stock market indices and gold price. In addition, there are two different theories on the relationship between gold demand and income. The classical theory argues that there exists a positive relationship between gold price and real income, while Keynesian theory argues that more demand means more economic backwardness hence low income, which indicates an inverse relationship.
The relationship between stock valuations and the gold price is another widely discussed correlation. The standard view is that these two markets are negatively linked: when the stocks go up, the yellow metal dives, and vice versa. Some studies found that there is no long run relationship between stock market of India and gold markets.
Is there a stable gold-stock relationship?
The relationship between stock valuations and the gold price is another widely discussed correlation. The standard view is that these two markets are negatively linked: when the stocks go up, the yellow metal dives, and vice versa. There is empirical evidence that confirms this common opinion, at least partially. The chart below shows the gold price and S&P 500 Index. As you can see, from 1987 to 2000 there was negative correlation between these two markets. Then, the dot-com bubble started bursting in 2000, while the bull market in gold began not earlier than in 2001. The stocks and gold have also been moving in opposite directions since 2011; however the 2000s can be regarded generally as a period of co-movement. Therefore, this chart clearly indicates that the gold-stock relationship changed over time, depending on external conditions, especially the macroeconomic factors.
Chart 1: Gold price (red line, left scale) and S&P 500 Index (green line, right scale) from 1968 to 2015.
Figure
Why do we often see a negative correlation between the stocks and the shiny metal? Well, this is connected with risk aversion. When traders go into defensive mode, they may prefer gold to relatively risky stocks. The saying goes that gold is a safe-haven, so it is naturally negatively correlated (or at least uncorrelated) to stocks during serious financial turmoil, like in 2008.
The second reason is that the opportunity costs and the resulting investment flows change over time. The risk appetite is the one factor affecting the relative attractiveness of stocks in comparison to gold, but not the only one. Others include the pace of economic growth, the real interest rates, the U.S. dollar exchange rate, the momentum in both markets and so on. Typically, when the economy experiences a slowdown with falling stock market returns, investors may shift their funds from stocks and invest them in the gold market until the economy rebounds. This scenario is likely to happen when the real interest rates are low, which is often the case during periods of a weak economy (due to low demand of cautious consumers and businesses, the monetary loosening implemented by the central banks to revive the growth, or the high inflation). The best example may be the 1970s, when the economy was in stagnation, and the stock market remained flat. The expansionary monetary policy caused high inflation and weak U.S. dollar. All of these factors combined with low real interest rates (largely due to high inflation) made gold much more attractive than stocks. Conversely, the next two decades were a period of stabilized economy and controlled inflation. The Volcker's interest rate hikes and reduced inflation led to higher real interest rates, which made gold less appealing. Additionally, the subsequent belief in economic prospects under the Clinton's New Economy (resulting partially from genuine wealth creation fueled by technological progress, deregulation and globalization) combined with Greenspan's monetary easing fueling the NYSE stock market bubble followed by the NASDAQ bubble.
I think good prices and stock market has inverse relationship if market go down than gold prices go up or vise Versa
Short-run? Already commented
Long-run? Already commented
Day-trade? In this case, specifically, no way to correlate, since it depends on local or global markets/local or global investors and other variables that can assume different positions in different situations.
My best wishes.
Hess
https://www.marketwatch.com/story/inverse-relationship-between-gold-stocks-has-never-been-this-extreme-2016-08-23
generally stock market is up when gold prices are down and vice versa
yes it is inverse proportion between gold and stock. But we should see and analyse the features of both in the short term and long term situation.
So gold has a roughly zero correlation to the stock market over time. Gold's Beta from the capital asset pricing model is zero, as per research I have here with co-authors - Article Is gold a Sometime Safe Haven or an Always Hedge for equity ...
This makes it an excellent diversifier in a portfolio. Its returns are also positively skewed where equity returns are negatively skewed - adding to the diversification benefits of holding gold.
Lastly gold acts as safe haven in a stock market crash. When stock markets fall sharply gold tends to hold its value or have very small moves up or down. That is also documented in the paper above.
I found positive correlation between the gold price and the Jakarta composite (JCI) in Indonesia based on monthly data from December 1999 to January 2021.
- Badges
- Science topic
- Similar topics
- Geoscience
- Asia
- India