Gold & Stocks: A Complicated Correlation

March 17, 2020

George Milling-StanleyThe equity market sell-off in the past few weeks has been shocking, and one for the history books. But what may also surprise you is the recent weakness in gold. Shouldn’t the safe-haven asset shine most in turbulent times?

Instead, gold turned lower as stocks sank in the last week, barely hanging on to any upside gains. Look at the year-to-date performance—and in particular, returns this past month—of the SPDR Gold Trust (GLD) relative to the SPDR S&P 500 ETF Trust (SPY):  

Chart courtesy of


GLD’s turn lower came accompanied by redemptions, which, since March 10, have exceeded $1.5 billion. Year to date, GLD is still in the black, with net creations of about $2 billion, but recent trading sessions have seen the ETF bleed assets.

George Milling-Stanley, chief gold strategist for the SPDR ETF business, tells us what’s happening in the gold market and what ETF investors can expect going forward. In this type of market, where everything is crashing, you’d expect people to flock to safe havens like gold. But gold, too, is under pressure. What gives?

George Milling-Stanley: Let's look back to the first big decline in the stock market a little over a two weeks ago. Gold went down and then bounced very rapidly. It did the same thing in the fourth quarter of 2018, when equities went under real pressure; during the crisis of 2008; during the sell-off after the bursting of the dot-com bubble in 2001; after the big sell-off in 1987.

Each time, gold went down very rapidly at exactly the same moment that equities went down. And then gold bounced within the days and weeks following, while equities didn't bounce anywhere near as much.

Why? It's gold doing exactly what it's supposed to do at times of weakness in the other assets. The issue is a lot of investors had bought equities on margin. When the value of the equity drops 7% or more in a day, they face calls for additional margin because their investments are worth less than they were before.

But rather than selling their equities in order to meet the calls for additional margin, they sell something that has held its value, which at that point is gold. They use the proceeds from sales of gold to meet the cash margin calls on their equities.

Then, as soon as equities stabilize, usually at lower levels, they will tend to buy their gold back—it provided some protection against the risk of a significant downward move in the equity markets. To that end, are Treasuries also effective?

Milling-Stanley: We always used to look to the bond market for some protection against potential downside in the equity markets, but we’ve often seen that stocks and bonds have moved together since the great financial crisis in 2009, rather than moving in the opposite direction. Gold has provided, over the last decade, much superior protection against downward moves in equities than the bond market did. And that is a major change in the financial market landscape. Had gold not been a strong asset—it rallied significantly in 2019—would is still be the No. 1-choice asset to be liquidated when investors need to come up with cash?

Milling-Stanley: That last summer we broke out of the top of a trading range that had been in force for six straight years is very important. Gold is a much more valuable asset the higher its price, allowing people the ability to sell less gold to meet those cash margin calls.

Another thing worth saying is the fact that gold is a very deep and liquid market. That has also been something that came to the rescue of investors. For example, it’s more liquid than timber land or real estate or private equity, or many other so-called liquid alternatives. Gold is the original liquid alternative, and probably the most efficient liquid alternative out there. Asset flows show that redemptions have been happening primarily in the biggest, most liquid gold ETF, GLD. It’s not in competing funds such as the SPDR Gold MiniShares Trust (GLDM), with only one day of outflows year to date, or the iShares Gold Trust (IAU). Does that speak to trading liquidity?

Milling-Stanley: Exactly. GLD is by far the most liquid gold ETF out there. There's no question it's still the 800-pound gorilla. The total amount of gold backing physical gold ETFs around the world currently stands at around $140 billion to $150 billion. GLD alone is more than one-third of that, so it’s the obvious one that people turn to. When they want a deep and liquid vehicle, there’s nothing to compete with GLD. What should we expect to see in gold going forward? The dollar has been strong, the equity market is super volatile.

Milling-Stanley: I don't think the dollar has had any kind of an influence on the performance of gold recently. It’s simply that the equity markets have been under such great pressure, people are able to alleviate some of that pressure by using their gold holdings. There were a lot of other reasons why gold is high, not just the coronavirus.

Gold had already moved up dramatically from its trading range before the pandemic. It topped out at $1,350 an ounce for six straight years. And it had already moved well beyond that territory long before coronavirus came along.

In macroeconomic terms, people were probably anxious, even before coronavirus and the recent downturn. Stocks had gone up for 11 straight years. Nobody really expected that performance to be replicated over the next 10 or 11 years. People were already a little wary about the potential for some significant downward move in stocks.

So, the outlook was starting to look cloudy for the stock market. Then you look at the bond market. Everywhere you look, you see negative yields or historically low yields. There's not a lot of opportunity there.

Gold, meanwhile, has been quietly moving steadily up. Even at a time when the equity market was going up another 30%, as last year, gold was also up.

There are a number of things in the internal market dynamics that are helping gold.

We've seen significant investment interest on the part of investors in the emerging world, which is relatively new. That's mostly currency-related; they have pretty weak currencies across the emerging world, and getting weaker.

We've also seen significant and solid buying for reserve purposes by central banks in the emerging markets over the last decade, because they feel they’re overweight Treasuries, with more than two-thirds of their reserves in U.S. Treasuries, and underweight gold, because on average they have less than 5% of their reserves in gold. They’re trying to balance somewhat.

People are also nervous politically. We're in an election year. We also have many geopolitical problems around the world. We still have trade wars. There are a lot of things out there that have been making people nervous, and coronavirus has been the precipitating factor pushing people into taking action. Aside from cash flow needs, should we expect gold ETFs to attract more assets from here?

Milling-Stanley: Unless there is renewed pressure from the equity markets—which might postpone a recovery in gold prices and postpone inflows into the ETFs—we're going to see gold prices recover, and money move back into GLD in more force than they had been, if history's any guide. In a more conceptual tone, as Treasury yields sink to record lows and we consider a zero-yield environment in the U.S., does that change gold’s profile as a safe-haven asset—a distinction the metal has always shared with Treasuries?

Milling-Stanley: There's no question that in a world of historically low—and in some cases, negative—interest rates, and in many cases, negative real interest rates, which is perhaps more important, gold is a safe haven.

One of the knocks against gold has always been that there is an “opportunity cost.” And this is in heavy quotes. But if there's no opportunity elsewhere, then the opportunity cost argument goes out of the window.

The other thing, gold doesn't have a coupon or a dividend, but if you look at things on a compound annual growth rate basis, then gold actually does provide a return. It's a capital appreciation return rather than a stream of payments. Since 1971, on a compound annual growth rate basis, gold has returned about 7.75%, which isn't too shabby when you look at where yields are on bonds these days.

Right now, gold is doing exactly what it’s supposed to do.

Contact Cinthia Murphy at [email protected]

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