What is gold most correlated with?

Gold provides diversification in a portfolio and is often correlated with the stock market during periods of risk, while it is decoupled and inversely correlated during periods of stress. This is unique among most hedges in the market.

What is gold most correlated with?

Gold provides diversification in a portfolio and is often correlated with the stock market during periods of risk, while it is decoupled and inversely correlated during periods of stress. This is unique among most hedges in the market. Gold generally has a negative correlation with the dollar. Considering that demand for dollars, while not as extreme as last month, remains at a healthy level, the likelihood of greater dollar strength is greater than the opposite.

This means that gold's bias should be bearish (chart below). It is not surprising then that gold attracts a lot of attention, from fundamental analysis to more technical trading strategies with gold. This is largely because gold can be traded in many forms, such as spot gold (XAUUSD), gold futures (GC), gold ETFs (GLD), and even gold stocks (mining) such as Barrick Gold Corp. If, for example, you want 2% of the portfolio in gold, then you need to sell when the price rises and buy when it falls.

Although the fact that gold and yen share safe haven status somewhat validates this correlation. At a time when foreign exchange reserves are large and the economy is advancing, a central bank will want to reduce the amount of gold it holds. The traditional logic here is that during times of economic turmoil, investors tend to leave the greenback in favor of gold. An example is oil; its generally slightly positive correlation with gold may turn negative in times of crisis.

Note the correlation of -91.8%, which means that gold and USDJPY tend to move inversely or in opposite directions. On a day-to-day basis, the correlation between oil and the Canadian dollar may break, but in the long run it has been strong, because the value of the Canadian dollar has good reason to be sensitive to the price of oil. Erb, from the National Bureau of Economic Research, and Campbell Harvey, a professor at Duke University's Fuqua Business School, have studied the price of gold in relation to several factors. However, as it did two weeks ago, the repo has started to fall (blue boxes), implying that gold will continue (graph below).

Broadly speaking, this indicates that gold's rally is likely to be complemented by the yen's rally, pushing USDJPY lower. In addition, if you stay long with a gold contract, you will be forced to pay an overnight rate (negative swap value). The reason why the Swiss franc (CHF) moves alongside gold is because more than 25% of Switzerland's money is backed by gold reserves. The positive correlation between gold and reverse repositories means that gold should also decrease (blue arrows in the graph below).

Gold is a commodity that is not linked to anything else; in small doses, it is a good diversification element for a portfolio. More specifically, given that economic growth and exports are directly related to a country's domestic industry, it is natural that some currencies are strongly correlated with commodity prices.

Benefits of investing in gold

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