Gold ETF Research: Gold Correlation Trends
Christian Magoon: Gold ETF investors know that one benefit of investing in gold is diversification. Gold’s correlation, or price behavior relative to other investments, has been low when comparing it to stocks, bonds and commodities. In fact its correlation to the U.S. Dollar is negative, which should make sense to most investors.
The World Gold Council recently issued a report on gold metrics and highlighted the long term and 2012 correlation trends for gold. Two important observations emerge from the correlation data.
First gold has increased its level of negative correlation to the U.S. Dollar in 2012. Its -.2 correlation to the greenback since 1987 doubled to more than -.4 in the first two quarters of 2012. This is likely due to the speculation and eventful occurrence of QE3.
Secondly gold has become more correlated over the first half of 2012 to commodities, global bonds, emerging markets and global equities. While gold’s correlation to these asset classes in 2012 has more than doubled in most cases, the most gains in correlation have come in emerging markets and global equities. These correlations have more than quadrupled in 2012.
Gold’s correlation to other asset classes has experienced notable deviations in 2012.
Rising correlations of other asset classes to gold (except for the U.S. Dollar) is certainly a trend to keep an eye on. Gold ETF shares have historically been attractive due to factors like portfolio diversification. If that benefit lessens, could gold prices suffer? Probably not because countering that trend is the increase in negative correlation to the U.S. Dollar. This trend is very bullish for gold ETF shares and could result in upside price movements that overwhelm any losses due to increased correlations to stocks, bonds and commodities.
Christian Magoon is Publisher of GoldETFs.biz and IndiaETFs.com. He is also CEO of Magoon Capital, a strategic consultant firm to asset managers. Christian Magoon is an ETF insider, having launched over 40 ETFs in the United States to date. A widely recognized thought leader on finance and market issues, Christian regularly contributes to many financial media outlets. Prior to forming Magoon Capital in 2010, Christian was President of Claymore Securities (now Guggenheim Investments), where he built one of the fastest growing and most innovative ETF businesses in the country, gathering more than $3 billion in AUM in three years. He launched more than 40 ETFs, introducing many “firsts” to the U.S. market, including the first Frontier Markets, Sector Rotation, Solar Energy, Timber, BRIC and suite of China focused ETFs. Christian consistently provides his industry insights and knowledge as a commentator in the U.S. media speaking publicly on macro investment issues and ETF related topics. Follow him on Twitter @ChristianMagoon. In 2008, he was named by Institutional Investor News as one of the five people to watch in the U.S. ETF marketplace. In 2011,Financial Planning magazine dubbed Christian an “ETF Pioneer.”