Advertise | Bookmark | Contact Us | E-Mail List |  | Update Page | UraniumSeek.com 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

Gold Miners’ Q3’17 Fundamentals
By: Adam Hamilton, CPA

Bonfire of the Absurdities
By: John Mauldin

The Social Security Inflation Lag Calendar - Partial Indexing Part 1
By: Daniel R. Amerman, CFA

Rob From The Middle Class Economics
By: Gary Christenson

GoldSeek Radio Nugget: John Williams and Chris Waltzek
By: radio.GoldSeek.com

The Metals Market Is A Mess And Will Likely Continue To Frustrate You
By: Avi Gilburt

Is New Fed Chief A “Swamp Critter Extraordinaire”?
By: GoldCore

Asian Metals Market Update: November-17-2017
By: Chintan Karnani, Insignia Consultants

Gold Seeker Closing Report: Gold Holds Near Unchanged While Stocks Gain on Tax Vote
By: Chris Mullen, Gold Seeker Report

Comparing Digital Metals
By: Craig Hemke

 
Search

GoldSeek Web

 
Is gold pro-cyclical or anti-cyclical?


 -- Published: Wednesday, 21 January 2015 | Print  | Disqus 

There are no two identical business cycles. Their courses depend on the many independent actions of market participants. Also, each time money flows and spreads out differently in the economy, affecting distinct prices in various ways. However, according to a general pattern, business cycles can be broken down into four stages, during which distinct assets classes, including gold, behave differently. To understand what may happen in the gold market during a possible recession, we have to examine how changes in the business cycle affect the performance of different asset classes.

 

So, according to the literature, stock prices mimic rises and falls in the business cycle, while bonds are anti-cyclical instruments. How does it look in detail? Let’s start from recovery. In that phase (or even at trough) stocks – the leading indicator of economic improvement – begin to grow. In the expansion stage, commodities are the best investment. Commodity prices rise because of the increased demand of entrepreneurs and inflation concerns. It is a good moment to sell bonds, because in the next phase interest rates are increased due to higher demand for credits and a rise in inflation expectations. The hike of interest rates and a credit crunch eventually worry equity market investors, who start selling stocks in anticipation of contraction. During recessions, cash is king, while commodity prices fall due to reduction in demand. In the last stage, i.e., depression, bonds perform the best, as the Fed lowers interest rates. Surely, this is a very simplified picture of the business cycle, not taking into account differences among countries (think about commodity exporting countries like Australia) or within asset classes (e.g., dividends stocks vs. growth stocks), however most of the economists agree that, in short, stocks lead commodities, commodities leads bonds and bonds lead stocks.

 

But where is gold in that picture? Gold generally doesn’t sync with stocks or bonds over the long run. This is why gold is the best asset class during slowdowns. It is a very interesting result, because commodities in general perform best during downturns. This confirms that gold is something more than just a commodity and is considered by investors as a hedge against currency weakness or financial turmoil. This also means that gold is neither pro-cyclical nor anti-cyclical. Therefore, gold investors should neither be afraid of recession nor assume that gold automatically gains if stock market collapses. It is true, as we pointed out in the last Market Overview, that in the last few years gold was negatively correlated with U.S. stocks (see chart 3). However, historically, gold moves independently. In other words, the relationship between gold and stocks has been anything but static. Changes in the correlation between these two asset classes depend mostly on two factors.

 

Graph 3: Gold price (PM Fixing, green line) and S&P 500 (red line) from 2005 to 2014

 

First, this relationship depends on how capital flows between asset classes. For example, after the real-estate market went bust in 2007/2008, hot money went into both stock and gold markets, significantly increasing the correlation coefficient between them. So the question is where the outflows from equities or commodities will go. We have to remember that markets are strongly interconnected today. Therefore, a sharp downturn in one asset class can actually pull down another, as investors are forced to raise cash. This is why gold fell immediately after Lehman’s bankruptcy and the stock market collapse. 

 

Second, the relationship between stocks and gold can be affected by the changes in the greenback’s value. Generally, stocks are negatively correlated with the U.S. dollar. However, during the last few years the greenback often declined in tandem with equities selloffs, e.g., between May 21, 2013 and June 5, 2013. Therefore, gold can gain in the case of stocks falling, but a lot depends, as we thoroughly explained in one of the previous editions of the Market Overview, on the behavior of the U.S. dollar. We are not saying that we are already entering a recession; however this is what just happened to Japan. And stock market investors were clearly nervous in December because of the low oil prices. Gold investors should be simply aware that, according to the business cycle approach to the asset allocation, falling commodity prices often signal the recession. Therefore, they should also know what entering into recession implies for gold market, and understand that equity selloffs do not guarantee gains in gold. A lot of depends on Fed’s monetary policy and the behavior of the U.S. dollar.

 

Thank you.

 

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor


| Digg This Article
 -- Published: Wednesday, 21 January 2015 | E-Mail  | Print  | Source: GoldSeek.com

comments powered by Disqus



 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2017



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer

The views contained here may not represent the views of GoldSeek.com, its affiliates or advertisers. GoldSeek.com makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, is strictly prohibited. In no event shall GoldSeek.com or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.