By Sean Williams
Gold and the stock market aren't often highly correlated, but this unique factor could affect both.
This has been a memorable year for investors. In April, investors were present for seven stock market events that hadn't occurred for at least a decade. This included the worst two-week stretch ever to begin the year for all three major indexes, followed by the biggest intra-quarter rally since 1933 for the S&P 500. We also witnessed West Texas Intermediate oil and natural gas hit 12- and 17-year lows earlier in the year.
But one of the biggest surprises this year has been gold's resurgence. After a multi-year downtrend, the lustrous yellow metal posted its best quarter in 30 years during Q1. For the year, spot gold prices have surged by more than $280 an ounce to $1,341 as of Friday's closing value.
Last week, investors witnessed yet another first. The correlation between gold futures and the stock market hit its lowest level ever recorded at minus 0.63 -- and we're talking about more than 30 years of recordkeeping here. For reference, a reading of 1 would represent a perfect correlation, 0 would mean indifference, and -1 would imply perfect opposition. Historically, the average correlation is -0.06. Based on FactSet data going to back to 1984, the opposition in movements between gold and the stock market has never been stronger.
Despite this opposition, it's my strong belief that both gold and the stock market could do something we're not used to: They could both simultaneously rise and head to new all-time highs.
Here's why gold and the stock market could both hit all-time highs
Gold is typically viewed as a safe-haven investment when uncertainty abounds or economic growth has slowed. It also tends to do well when the U.S. dollar is weakening. Conversely, stocks do well when the economy is running on all cylinders; and generally, when the economy is doing well, so is the U.S. dollar. The two investment theses would appear to be polar opposites, as the recent FactSet data implies.
However, there's a wildcard factor that could lead both gold and the stock market to head higher: near-record-low global yields.