There is much speculation over the relationship between the stock market and the price of gold, and no two experts can seem to agree on the exact nature of the complex mechanism that sets prices in each. However, there are observable trends than can let us in on just how, exactly, gold and the stock market work together (or against each other).
Does the stock market affect the price of gold? Not really. Or, at least, not directly. This makes sense for some very obvious reasons. Gold is a global market, and the stock market is a localized market (the NYSE represents only American corporations, for example). There is always a relatively stable demand for gold worldwide, and the stock market, although sometimes quite volatile, simply doesn’t have a whole lot of power when it comes to influencing the price of gold. However, it is worth noting that when the stock market is performing poorly, people are most likely to cash out on their holdings and invest in other, seemingly safer commodities. In cases like this, it is not uncommon for investors to choose gold. When there is more demand for gold, the value (price) of gold goes up.
Why gold? People tend to choose to invest in gold over stocks for a variety of reasons. Gold is a very safe investment. It is simply unlikely that there will ever come a day when gold is not worth something. Additionally, gold is a physical product. It can be handled and stowed away. This is not true for stocks, which are easy for many people to see as more of an abstract idea than an object that can be owned. Lastly, gold is a currency that is recognized worldwide.
The negative correlation between the price of gold and the stock market. While it can be said that the stock market doesn’t have a whole lot of power to affect the price of gold, it is also true that, when the reverse relationship is examined (the effect of gold pricing on the stock market), the opposite is true. There is what experts call a “negative correlation” between the price of gold and the stock market. When the price of gold goes up, the stock market is performing poorly; when the price of gold goes down, the stock market is performing well.
Does this mean that the price of gold affects the stock market? It’s hard to say. While there is definitely a correlation between the two markets, the question of which affects which is really one of the chicken or the egg. However, one thing is for certain: gold is not going anywhere, and it continues to be a viable investment choice when the stock market isn’t looking so good.
About the Author: Carolyn McConnell is fascinated by the stock market and the things that drive it. She is currently learning how to trade stocks online and hopes to start her own portfolio soon.