Once upon a time, gold and stocks
were thought to be inversely correlated. That is, when the market went up,
gold would go down, and when the market was down, gold would go up as
investors abandoned risky assets for the safety of sound money. Put another
way, stocks were for "normal" times and gold was something you owned
as protection against abnormal events like long bear markets or sudden
crashes. See the 2008/2009 part of the first chart below (blue line is the
Dow, green line is gold) for an example of inverse correlation in action.
But post-crash, with the government
borrowing trillions and running the printing press flat-out, gold and stocks
became positively correlated, as newly-created credit pushed up the price of
pretty much everything.
And now the relationship seems to be
breaking down altogether. In the past week, stocks went up and stocks went
down -- and gold just went up. As this is written on July 11, the Dow is down
about 1.3% for the day, while gold is up a few bucks to near its all-time
What, if anything, does this mean?
There's no way to know for sure, but one possibility is the expected impact
of the Pan Asia Gold Exchange, which will bring gold to a new, potentially
huge, market. See this King World News interview for a more
Or it could mean that investors have
finally figured out that all possible economic outcomes are good for gold. If
Washington's prodigious borrowing sends the economy into inflationary
overdrive, capital will pour into precious metals. If QE2 was a bust and the
economy starts to sink, that guarantees an even bigger stimulus plan in the
near future. Either way, gold is the one clear winner.
Or maybe the marketplace is finally
catching up with years of price suppression and bringing gold into line with
the amount of paper currency that exists in the world. Estimates of the gold
price that's necessary to bring about this balance vary, but they're all far
higher than the current price.