Over the past few years, investing in precious metals has become extremely popular. Many have seen the benefit of having a “safe haven” holding in their portfolio, as it tends to help cushion the volatility when markets are chaotic. So now, more than ever, investors are turning to gold and silver to shelter them from the chaos that is our global economy. Over the past few years, these two metals have been amongst not only the best performing commodities, but also amongst the best performing assets period. But while many investors pour into these two elusive metals in search of safe haven exposure, they may not be getting the exposure, or safety, they think they are [see also 50 Ways To Invest In Gold].
In recent weeks, markets have swayed violently back and forth in response to the European debt crisis, which has formed an interesting pattern in these two metals; resulting in relatively high correlation to broad equity markets. Typically, investors opt for exposure to precious metals given their historically uncorrelated returns, as they typically gain when equities falter, but recently this has not been the case. Beginning September 23rd, the SPDR Gold Trust (GLD) has featured a 0.77 correlation to SPY. Over that same period the iShares Silver Trust (SLV) has a correlation of 0.86 to SPY. These figures should cause investors’ stomach to turn, as their precious metals exposure has been behaving like just another equity investment [see also 25 Ways To Invest In Silver].
Precious Metals Correlation: A Myth?
For the average portfolio, a correlation above 0.75 is considered high and implies that the assets are behaving in a nearly identical manner. Moving further down the scale, 0.2 is moderate diversification, -0.2 is good diversification, and anything better than -0.7 is considered excellent diversification. The past few years have seen the development of the notion that GLD and SLV represent uncorrelated plays on the market, making them safe haven bets for your portfolio. But looking at historical trends (aside from 2011), one would have to go back to 2007 to find a year where these two metals weren’t highly correlated to the S&P 500. For all of 2011, both ETFs have featured low correlation, but as recent trading weeks have shown, old habits die hard, as the two ETFs have fallen back into a highly correlated trend [see also Three Reasons Why Gold Is Overvalued].
| Correlation | 2007 | 2008 | 2009 | 2010 | YTD | *Recent |
|---|---|---|---|---|---|---|
| GLD v SPY | 0.37 | 0.65 | 0.78 | 0.57 | -0.36 | 0.77 |
| SLV v SPY | 0.14 | 0.84 | 0.84 | 0.77 | 0.07 | 0.86 |
| *9/23/2011 – 11/10/2011 | ||||||
As noted in the table above, these two ETFs have featured strong correlation to SPY in ’08, ’09, ’10, and the past few weeks. Despite 2011 YTD correlations being the best in several years, this recent trend may give investors reasons to re-consider their allocations.
A Grain Of Investing Salt
While keeping an uncorrelated portfolio is certainly important, correlation should always be taken with a grain of salt. Anyone familiar with these precious metals over the past few years is fully aware that they have been steadily outpacing the S&P 500. But how can two assets with high correlation have such different returns? The difference comes from the downside risks that each feature. Simply put, precious metals have a much lower downside risk than equities, allowing them to hold their ground. For example, if SPY drops 5% in a day and GLD drops 1%, the correlation between the two assets would still be relatively high, but the returns turn out vastly different [see also Seven Reasons To Hate Gold As An Investment].
| Returns | ||||||
|---|---|---|---|---|---|---|
| Ticker | 2007 | 2008 | 2009 | 2010 | YTD | *Recent |
| GLD | 30.56% | 4.96% | 23.99% | 29.27% | 20.63% | 7.10% |
| SLV | 14.25% | -23.39% | 47.29% | 82.14% | 10.80% | 10.54% |
| SPY | 5.12% | -36.70% | 26.31% | 15.02% | 1.18% | 9.49% |
| *9/23/2011 – 11/10/2011 | ||||||
As demonstrated above, the returns of these three assets are astronomically different, despite their fairly high correlation to one another. Note that silver prices tend to be volatile over the long term, while gold tends to be more stable. With the exception of GLD in 2009, both precious metals funds have outdone SPY each of the past four years, proving that their high correlation may not be all that big of an issue [see also Commodity Trading Trends: Silver In Focus].
In the end, precious metals are still great safe haven holdings, but it is important to understand that there has been a strong correlation to equities over the past few years, and it may prompt you to reconsider how you allocate assets within your portfolio.
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Disclosure: No positions at time of writing.
[...] Jared Cummans: Over the past few years, investing in precious metals has become extremely popular. Many have seen the benefit of having a “safe haven” holding in their portfolio, as it tends to help cushion the volatility when markets are chaotic. So now, more than ever, investors are turning to gold and silver to shelter them from the chaos that is our global economy. Over the past few years, these two metals have been amongst not only the best performing commodities, but also amongst the best performing assets period. But while many investors pour into these two elusive metals in search of safe haven exposure, they may not be getting the exposure, or safety, they think they are [see also 50 Ways To Invest In Gold]. [...]
[...] Today started off on a rough note, as more troubles in Europe combined with the still unresolved debt crisis that has only a week left in its timetable. Stocks made a climb during midday to nearly break even, but then tumbled to finish out the day. The Dow lobbed off nearly 200 points while the S&P saw a decrease of 1.7%. Gold exhibited a similar trend to equities as the commodity has been frustratingly correlated as of late; the precious metal finished out the day with losses nearing $10/oz. Finally, the euro saw another dip against the dollar, losing 0.5% and is presenting what many feel is one of the reasons for gold’s lackluster performance [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Yet another down day for the Street as investors try to strafe fears from the euro zone as well as U.S. worries. Though there was no single event that sent stocks into the gutter, it seems that profit taking for an uncertain future went into effect. Overall, the Dow lost 134 points and the S&P sank about 1.7%; two straight days of heavy losses. Gold, the recently correlated precious metal, saw its price drop by a crushing 3%, as the safe haven metal has been slowly losing its luster. Finally, the big loss on the day came from oil, which saw its price dip by nearly $4/barrel as prices calmed down after yesterday’s surge [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Yet another down day for the Street as investors try to strafe fears from the euro zone as well as U.S. worries. Though there was no single event that sent stocks into the gutter, it seems that profit taking for an uncertain future went into effect. Overall, the Dow lost 134 points and the S&P sank about 1.7%; two straight days of heavy losses. Gold, the recently correlated precious metal, saw its price drop by a crushing 3%, as the safe haven metal has been slowly losing its luster. Finally, the big loss on the day came from oil, which saw its price dip by nearly $4/barrel as prices calmed down after yesterday’s surge [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] and the S&P sank about 1.7%; two straight days of heavy losses. Gold, the recently correlated precious metal, saw its price drop by [...]
[...] Yet another down day for a Street as investors try to torpedo fears from a euro section as good as U.S. worries. Though there was no singular eventuality that sent bonds into a gutter, it seems that distinction holding for an capricious destiny went into effect. Overall, a Dow mislaid 134 points and a SP sank about 1.7%; dual true days of complicated losses. Gold, a recently correlated changed metal, saw a cost dump by a abrasive 3%, as a protected breakwater steel has been solemnly losing a luster. Finally, a large detriment on a day came from oil, that saw a cost drop by scarcely $4/barrel as prices calmed down after yesterday’s swell [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Gold And Silver In A Correlation Bubble? at CommodityHQ: [...]
For neutron diffraction vanadium cylinders are used as sample holders. Vanadium has a negligible absorption and coherent scattering cross section for neutrons and is hence nearly invisible in a powder diffraction experiment.
[...] With the holidays quickly approaching, the retail sector of the U.S. economy is gearing up for a short stretch that could make or break profitability forecasts and the mid-term outlook for companies that have exhibited surprising strength over the past 12 months. Retailers are already preparing for blow-out sales, Black Friday mania, and the oncoming slew of Christmas shoppers. Investors are focused on the retail sector this time of year as many companies generate significant portions of annual revenues and profit during the holiday months of November and December. Last year’s holiday season saw sales skyrocket more than 5% in comparison to 2010. Unfortunately, projections for this year’s season aren’t as cheery and can be sufficiently summed up as being average [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Today saw markets hold their ground after yesterday’s strong performance. The day finished out with the Dow adding 32 points and the S&P 500 jumping 0.22%. 10 year bonds saw a healthy jump of nearly 2%, giving investors hope that the positive figures that have been rolling in for the U.S. are starting to piece the economy back together. Gold saw another day of correlation, as it returned 0.12% for investors who are growing tired of watching the precious metal move in tandem with equities. Crude oil was one of the biggest commodity stories, as the fossil fuel tacked on roughly $1.34 per barrel as it inches back towards the triple digit mark [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Today saw markets hold their ground after yesterday’s strong performance. The day finished out with the Dow adding 32 points and the S&P 500 jumping 0.22%. 10 year bonds saw a healthy jump of nearly 2%, giving investors hope that the positive figures that have been rolling in for the U.S. are starting to piece the economy back together. Gold saw another day of correlation, as it returned 0.12% for investors who are growing tired of watching the precious metal move in tandem with equities. Crude oil was one of the biggest commodity stories, as the fossil fuel tacked on roughly $1.34 per barrel as it inches back towards the triple digit mark [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Equity indexes posted a mixed performance on Thursday as investors anxiously await for a resolution in the Euro zone, while the bulls on Wall Street have their eyes set on the unemployment report due out later today. The Nasdaq led the way higher for the day with a 0.22% gain, while the Dow Jones Industrial average lagged behind in negative territory, shedding 0.21% on the day. Fear in the markets has eased up considerably as evidenced by the Volatility Index, which fell under 30 for a second day in a row. Gold drifted sideways much like equity markets, settling near $1,750 an ounce as the trading session drew to a close [see Gold And Silver In A Correlation Bubble?]. [...]
[...] Equity indexes posted a mixed performance on Thursday as investors anxiously await for a resolution in the Euro zone, while the bulls on Wall Street have their eyes set on the unemployment report due out later today. The Nasdaq led the way higher for the day with a 0.22% gain, while the Dow Jones Industrial average lagged behind in negative territory, shedding 0.21% on the day. Fear in the markets has eased up considerably as evidenced by the Volatility Index, which fell under 30 for a second day in a row. Gold drifted sideways much like equity markets, settling near $1,750 an ounce as the trading session drew to a close [see Gold And Silver In A Correlation Bubble?]. [...]
[...] as evidenced by the Volatility Index, which fell under 30 for a second day in a row. Gold drifted sideways much like equity markets, settling near $1,750 an ounce as the trading session drew to a [...]
[...] prices have fallen into an awfully correlated price pattern with domestic equity benchmarks [see Are Gold And Silver In A Correlation Bubble?]. Even more worrisome is the fact that gold prices have been range-bound as Euro zone debt woes [...]
[...] prices have fallen into an awfully correlated price pattern with domestic equity benchmarks [see Are Gold And Silver In A Correlation Bubble?]. Even more worrisome is the fact that gold prices have been range-bound as Euro zone debt woes [...]
[...] Everyone’s favorite precious metal, gold, had a strong year in 2011, with the commodity gaining roughly 15% in just 12 months. But the final month of the year took its toll on the yellow metal, as its price dropped from roughly $1,700/oz. to as low as $1,545/oz. marking a decrease of 9.1% in just 31 days. Though the metal still had a solid 2011, December put a major dent in the commodity’s gains, but it also created a strong opportunity for investors and traders alike. Gold broke through the $1,900/oz. mark for a brief moment last year, making its current prices look incredibly cheap. With stocks poised for an uncertain future and turmoil still swirling around the world, now may be the perfect time to buy into gold [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Everyone’s favorite precious metal, gold, had a strong year in 2011, with the commodity gaining roughly 15% in just 12 months. But the final month of the year took its toll on the yellow metal, as its price dropped from roughly $1,700/oz. to as low as $1,545/oz. marking a decrease of 9.1% in just 31 days. Though the metal still had a solid 2011, December put a major dent in the commodity’s gains, but it also created a strong opportunity for investors and traders alike. Gold broke through the $1,900/oz. mark for a brief moment last year, making its current prices look incredibly cheap. With stocks poised for an uncertain future and turmoil still swirling around the world, now may be the perfect time to buy into gold [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Had this list literally taken to the top five performing commodity ETPs on the year, four out of the five would have been focused on gold. There has simply been no stopping this metal through out the year as investors have deemed the commodity to be one of the only safe haven investments left on the market. 2011 saw gold break through $1,900/oz. and many feel that it is only a matter of time before it smashes the 2K mark. Unfortunately, gold has been stuck in something of a correlation rut over the last few weeks, with its performance greatly hinging on equities. Predicting how long this trend will last is difficult, but the gains put forward by these ETPs are hard to ignore. Charging just 25 basis points, IAU, a physically-backed fund, was the best gold performer on the year [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Investors have been using these precious metals as safe haven for years, but these assets have actually featured a high correlation to major benchmarks over certain periods of time. In 2008, 2009, and 2010, both gold and silver featured a correlation of more than 0.57 to the S&P 500; a score that hardly qualifies as diversified. The highest correlations came in 2009 when gold scored a 0.78 and silver scored a 0.84. The lesson here is quite simple, just because you have invested in commodities does not mean you are properly diversified. It is important to always look under the hood of your positions and analyze their behavior [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] Investors have been using these precious metals as safe haven for years, but these assets have actually featured a high correlation to major benchmarks over certain periods of time. In 2008, 2009, and 2010, both gold and silver featured a correlation of more than 0.57 to the S&P 500; a score that hardly qualifies as diversified. The highest correlations came in 2009 when gold scored a 0.78 and silver scored a 0.84. The lesson here is quite simple, just because you have invested in commodities does not mean you are properly diversified. It is important to always look under the hood of your positions and analyze their behavior [see also Gold And Silver In A Correlation Bubble?]. [...]
[...] week’s heavy trades weren’t enough to confirm that theory, there is even more evidence correlating to Bernanke’s speeches and movements in the U.S. dollar. Specifically, Bernanke’s [...]
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