Sharps Pixley’s Ross Norman wonders why gold and equities are in synch

Ross Norman, CEO of UK-based precious metals trader Sharps Pixley, wonders why gold and equities are moving up together.

Since late October 2011 gold and the equity markets have become closely correlated. This raises two rather more important question than it at first appears. Firstly why – and secondly what does this mean for gold’s safe-haven status. ?

In a recent survey of hedge funds by Barclays Capital this week, it was stated that “Portfolio diversification” is the number one reason for buying into commodities, supported by over half of all respondents. If, however, gold and equities are becoming increasingly correlated then this could potentially kill the most important motivation for would-be buyers.

On the year to date spot gold has gained 12.5%, the S&P 500 is up 7.5%, the DJIA is up 5% and oil is up 5%. Meanwhile the USD dollar index is off nearly 3%.

Our reading of this is that there are two reasons for the correlation – one coincidental and the other a natural consequence of economic remedies. The ‘coincidental’ argument runs that gold is still benefiting from a technical correction following the 25% fall in September of last year – the current price strength should be seen within the context of the 50% price retracement. In addition, there has been some phenomenal buying from China (quite at odds with a near vacuum conditions in Europe at this time!) which is quite probably linked to buying for the Chinese Central Bank. Meanwhile oil is fixated upon Iran, while the equity markets have been given a shot in the arm from some hitherto positive economic data out of the USA.

The economic remedies argument runs that the ‘easy money’ and low interest rate economic remedies favour both gold and equities, but for quite different reasons. It helps gold because it creates the possibility of inflation down the line while low interest rates continue to make it unappealing for gold producers to want to sell forward and thereby effectively killing the bull run. For equities it eases concerns about the availability of credit for companies plus it makes equities look more appealing than other interest-bearing asset classes.

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