Dow Jones

What do the Dow Jones and my ex have in common? They are both doing really well and all my friends are in them except me…

The Dow Jones Industrial Average (also known as the DJIA, the Dow Jones, or simply the Dow) is a stock index of 30 large and well-known publicly-owned companies traded on the New York Stock Exchange or the Nasdaq (such as Apple, Coca-Cola, JPMorgan Chase, Microsoft, Wal-Mart, or Walt Disney). The index was created by Charles Dow in 1896, which makes it one of the oldest stock indexes in the world. It also remains one of the most closely monitored and regularly cited stock indexes as a measure of stock market performance, especially by the general public. However, it does not take into account the market capitalization of each stock, and it includes only 30 companies – which is why some analysts consider the S&P 500 a better representation of the overall market performance.

Dow Jones and Gold

The relationship between stock valuations and the gold price is widely debated. The standard view is that these two markets are negatively linked: when stocks go up, the yellow metal dives, and vice versa. This is indeed often the case, as gold is a safe haven, so when traders get defensive, they may prefer gold to relatively risky stocks. Clearly, as the chart below shows, there have been many periods when stocks and gold have been moving in opposite directions. This is why gold is also a good portfolio diversifier, as it provides a hedge against the Dow Jones. Hence, it is a good idea to add some gold to the equity investment portfolio.

Gold and Dow Jones

However, the above chart, which presents the price of gold and Dow Jones, also shows periods of co-movement (think about the 2000s). It means that the gold-stock relationship changes over time, depending on external conditions, especially the macroeconomic factors. Hence, although there is sometimes a shift of funds from equities to gold market in times of stock crashes, the link between the Dow Jones and gold is complex and dependent on external macroeconomic factors.

The best example might be the co-movement of the Dow Jones and the gold prices during the 2020 coronavirus crash. As the chart below shows, the stock market and the gold market plunged in tandem in March 2020 just to rebound together in April. It seems that when the stock market went down, investors sold gold holdings to raise cash and cover margin calls. 

Dow Jones and Gold Chart

Dow Jones and Silver

As one can see in the chart below, there is no clear correlation between silver prices and the Dow Jones. Although both asset classes moved in tandem during most of the 2000s, there were also periods of negative correlations or independent behavior, for example due to different specific developments in the silver market (see: Silver Thursday). Hence, as silver prices are very closely linked to gold prices, this metal also serves as a safe-haven asset and a portfolio diversifier, as it hedges against the Dow Jones.

Silver and Dow Jones