We’ve always heard that gold has an inverse relationship with the stock market—meaning when the markets are down, gold is up and vice versa. But there have been times when stocks and the yellow metal rise and fall together, so the correlation is a bit more complicated than simply following a chart line.
The truth is that gold and equities are two very different animals—and understanding their behavior, inherent traits, and feeding habits could very well be the key to growing and preserving wealth.
Wall Street is a storied place of high finance and high stakes. While it is an eight-block section of lower Manhattan, it is also the financial center of the United States and, most would argue, the economic nerve center of the world. It is the home of charging bulls and scampering bears who run on sentiment and feast on investor emotion. It is where fortunes are made and lost in an afternoon and where wealth can be built over a lifetime—or evaporate in the micro-flash of a black-box trade.
In the straddle and strangle of dark pools, shadow banks, and hidden loopholes, sentiment can turn on a dime. Down in the pit, traders pace floors and watch boards for momentum shifts as anxious brokers call in a buy or jump on a sell to hang onto a small gain or limit a larger loss.
In these manic marketplaces, we put out money to buy shares in a company in the hopes of getting a return—despite the fact that we have virtually no control over that company’s management or marketing strategies. We are left holding an electronic certificate whose value is determined by what someone else is willing to pay for it. In this respect, equities are the consummate leap of hope and faith, and yet—when the news cycle is just right or a new product launch is perfectly timed—we’re rewarded handsomely.
Gold, on the other hand, is not a piece or a portion of anything, nor is it representative of something else. It’s not subject to mechanical trading systems or buy glitches. It has no corporate charter or board of directors—and its price is not dependent upon capital appreciation or consolidated balance sheets. The appeal of gold is driven by its beauty, its rarity, and its long association with money. Gold thrives on economic uncertainty, and it’s fueled by financial calamity.
This lustrous metal has been mankind’s standard of money since ancient times and the measure of wealth for humanity’s most powerful countries and kingdoms. Gold was not only early man’s medium of trade and payment, but it also formed the system by which all paper currencies were ultimately defined. Today, it continues to protect the purchasing power of central and reserve banks and can be found in the vaults of monetary authorities across the globe.
Gold prices rise and fall on supply and demand, and since the financial crisis, this has been predominantly driven by fear. Gold’s relationship with stocks is inverse in the sense that its price increases in response to events and conditions that cause stocks and bonds to decline. In short, gold is a hedge against financial volatility, economic malaise, and market anxiety.
So moving money into the stock market and acquiring gold are two very different gestures. Stocks can be volatile and subject to break-neck rallies as well as historic meltdowns. Gold is a well-established safe haven that has proven to retain its purchasing power over the long term.
While Wall Street is driven by a minute-to-minute news cycle, shifting market confidence, and fluid earnings ratios, gold derives its price from the long arc of history—and its viability extends far beyond the close of each trading day.
When the stock market descends into chaos, gold is often the last flight out to safety—for this reason, it is an essential part of a balanced and diversified portfolio.