S&P 500 and Gold

The Standard & Poor’s 500 Index (S&P 500, or just S&P) is an index of the 500 largest U.S. corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. The relationship between stock valuations and the price of gold is widely debated, with a popular view being that the two markets have a negative correlation. But is this always the case?

As the joke goes, S&P 500 crashes are worse than divorces. An investor could lose half of their money and their spouse would still be there.

The S&P 500 index was introduced in 1923, but the index in its present form began on March 4, 1957. Contrary to the Dow Jones Industrial Average, the S&P 500 is a market value-weighted index that includes 500 companies across all industries and both growth and value stocks. For these reasons, the S&P 500 is one of the most commonly followed equity indices, and it is believed to be one of the best representations of the U.S. stock market.

Negative Link Between S&P 500 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 the 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 go into defensive mode, 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.

Figure 1

The best example of a negative link between the S&P 500 and gold may be the Great Recession, as seen in figure 2. The housing bubble burst in 2007, and the following global financial crisis sank the S&P 500 by 50% from top to bottom. Meanwhile, the price of gold surged 39% in the same period between July 2007 and March 2009. By September 2011, the monthly price of gold skyrocketed 166%, while the S&P 500 was still 23% below its 2007 peak. Hence, gold is also a good portfolio diversifier as it provides a hedge against the S&P 500 Index. Thus, it is a good idea to add some gold to the equity investment portfolio.

Figure 2

Correlation Between S&P 500 and Gold

However, the first chart (figure 1), which presents the long-term trends of gold prices and the S&P 500 Index, also shows periods of co-movement. It means that the gold-stock relationship changes over time, depending on external conditions, especially macroeconomic factors. Hence, although there is often a shift of funds from equities to the gold market during stock crashes, the link between the S&P 500 and gold is complex and dependent on external macroeconomic factors.

The best example might be the co-movement of the S&P 500 and gold prices during the 2020 coronavirus crash. As the chart below (figure 3) shows, the stock market and the gold market plunged in tandem in March 2020, and rebounded together in April. It seems that when the stock market went down, investors sold their gold holdings to raise cash and cover margin calls. However, please note that gold’s performance was much more bullish in that period. By the end of April it had risen by 6% since mid-February, while the S&P 500, despite the rebound, was still 14% below the peak.

Figure 3