by
Co-Head of Real Asset Strategy

Analysis and outlook for the real assets market

  • Gold often moves opposite the stock and bond markets.

What it may mean for investors

  • Don't always count on gold saving your portfolio, should stocks get clobbered.
  • Gold is a good inflation hedge, but not a great one.

Download the report (PDF)

How Gold Behaves

Listed below are a series of questions that investors repeatedly ask us about gold's performance. We will address each question today.

  • Gold versus other assets - Does gold trade like a stock, bond, or a traditional commodity? 
  • Gold's performance when stocks fall – Does gold help preserve portfolios when stocks are getting clobbered? 
  • Gold versus bonds when stocks fall - Is gold a better hedge against falling stocks than bonds? 
  • Gold as an inflation hedge – Is gold a good inflation hedge?
  • Gold versus the U.S. dollar – Is it true that gold moves opposite the U.S. dollar?

Gold versus Other Assets

Does gold move like a stock, bond, or another commodity? The answer is that gold is first and foremost part of the commodity family, and it travels with the family over the long run. In fact, gold often moves opposite the stock and bond markets, as does the rest of the commodity complex. Chart 1 highlights this point relative to stocks. Gold prices (blue line) and the commodity complex (red line) are shown in the top panel. The shaded areas in the top panel represent commodity bear market super-cycles (long term cycles). Notice that gold pretty much tracks the rest of the commodity complex through bull and bear periods. Stocks as represented by the Dow Jones Industrial Average, are shown in the bottom panel. Stock bear super-cycles are the shaded areas in the bottom panel. Notice how the shaded areas in the top panel do not match the shaded areas in the bottom panel. This tells us that commodities and stocks run in different cycles; when one group is moving up in price, the other is typically moving down.

Chart 1. Supercycles – Gold and Commodities vs. Stocks


Graph comparing the performance of gold and commodities versus stocks. Contact your Relationship Manager for more information.

Sources: Bloomberg, Kitco, Prices by G.F. Warren and F.A. Pearson. Monthly Data: 1/31/1900 - 1/31/2017. Data shown in log scale.Shaded area at top represents secular commodity bear markets. Shaded area at bottom represents bear markets in stocks. Top clip: Silver price moves used as proxy for gold prior to 1/31/1968 since gold had fixed price. Past performance is no guarantee of future results.

Gold's Performance When Stocks Fall

Table 1 is a performance grid showing gold's price action during declines in the S&P 500 Index since 1968 (when gold's price started floating more freely). The table shows that gold has generally been a good place to hide when stocks have been hit by five percent or more. A few Table 1 statistics worth highlighting: 

  • Gold has almost always beaten stocks when stocks have fallen by five percent or more (92 percent of the time).
  • However, gold has not always risen when stocks declined by five percent or more; gold had a positive return only 53 percent of the time.
  • Gold performed best when stocks were at their worst. The average gold return was 14.2 percent when the S&P 500 Index fell by 20 percent or more.

Table 1. Gold and S&P 500 Performance Around S&P 500 Declines


Table of gold's performance around declines in the S&P 500 index. Contact your Relationship Manager for more information.

Sources: Ned Davis Research Group, Wells Fargo Investment Institute. Daily Data. Full date range analyzed: 3/20/1968 - 1/31/2017. Dates selected to analyze full range once gold price started to move freely.

Gold versus Bonds When Stocks Fall

When stocks get clobbered, and market fears are running rampant, which has been the best place to hide—gold or bonds? If you prefer low volatility, then the answer has been bonds. If you prefer better returns, albeit with greater risk, the answer has typically been gold. A few salient stats from Table 2, which shows bond performance during declines of the S&P 500 Index: 

  • U.S. Treasuries outperformed the S&P 500 Index 100 percent of the time when the S&P 500 index declined by 10 percent or more. This was in contrast to gold, which occasionally underperformed the S&P 500 Index when it declined by 10 percent or more.
  • U.S. Treasuries turned in positive returns only half the time, when the S&P 500 Index declined by five percent or more. These are similar returns to gold versus the S&P 500 Index. 
  • Treasuries have lacked gold's average performance upside, when stocks have been at their worst. When stocks dropped by 20 percent or more, U.S. Treasuries averaged a 2.6 percent return, in contrast to gold's average return of 14.2 percent.

Table 2. Treasury Bonds and S&P 500 Performance Around S&P 500 Declines


Table of treasury bonds' performance around declines in the S&P 500 index. Contact your Relationship Manager for more information.

Sources: Ned Davis Research Group, Wells Fargo Investment Institute. Daily Data. Full date range analyzed: 3/20/1968 - 1/31/2017. Dates selected to analyze full range once gold price started to move freely.

Gold as an Inflation Hedge

Investors often think that buying gold can help a portfolio beat inflation, or as an economist would say, that gold is a great inflation hedge. But is that true? Our answer is that gold is a good inflation hedge, but not great. Over the last 100 years, gold has overall outperformed consumer inflation, which makes it a good inflation hedge. However, gold has a habit of underperforming inflation for large swaths of time, which can be seen in Chart 2. Chart 2 shows two lines, both of which are the price of gold. The blue line is the price of gold since 1914 (silver is used as a proxy for gold prior to 1968, when gold began floating more freely). The green line is how gold would have performed had it been priced at the rate of inflation (using the Consumer Price Index (CPI) as an inflation proxy). The shaded areas in the bottom panel show the periods when gold failed to keep up with inflation (when gold was not a good inflation hedge). Notice how there is much more shaded area than not. The bottom line shows is that gold has beaten inflation over the long-run, but it has a habit of underperforming the rate of inflation for extended periods of time. We consider gold a good inflation hedge, but not a great one.

Chart 2. Gold vs. CPI


Graph comparing the price of gold to the consumer price index (CPI) since 1914 through 2016. Contact your Relationship Manager for more information.

Source: Bloomberg, Kitco, Wells Fargo Investment Institute. Note: Prices shown in log scale. Monthly Data: 1/31/1914 - 12/31/2016. Dates selected to show all available information.Ratio is the price of gold divided by the price of gold in terms of CPI. *Gold prices based on annual returns of silver prior to 1/31/1950 and monthly returns of silver prior to 3/31/1968. **CPI allocated to gold's fixed cost ($20.67) on 1/31/1914. Past performance is no guarantee of future results.

Gold versus the U.S. Dollar

Another common claim about gold is that it's a good asset to hold should the world lose confidence in the U.S. dollar. Or said another way, does gold move opposite the U.S. dollar? The answer is yes, gold does generally move opposite the U.S. dollar, but not always. Chart 3 tracks prices of the U.S. Dollar Index (first panel) versus gold (second panel). The third panel shows the rolling one-year correlation between the two. Notice that the average correlation (horizontal yellow dashed line), since 1981, has been a negative 0.30, showing that the U.S. dollar and gold do generally move in opposite directions. However, the rolling correlation makes it clear that there are periods where the negative connection has been less—even positive some times, like in the early 1990s.

Chart 3. U. S. Dollar and Gold vs. Dollar-Gold Rolling Correlation


Graph comparing the U. S. dollar and the price of gold and its 1-year rolling correlation. Contact your Relationship Manager for more information.

Sources: Bloomberg, Wells Fargo Investment Institute. Daily Data: 1/1/1981 - 2/14/2017. Data is shown in log scale in clips 1 & 2. Dates selected to show how correlations changed during most recent bull and bear super cycles. Past performance is no guarantee of future results.

Tomorrow, we'll take a look at the value of gold, particularly how it compares to major assets and other precious metals.

Addendum: Using Silver as a Gold Proxy Prior to 1968

Tracking the price of gold historically is no easy task. The reason is that it was used as money for centuries, which means that governments routinely fixed its price. Or said another way, the price of gold was not allowed to float freely. This changed in the United States in 1971 when President Nixon closed the gold window. Closing the gold window meant that the U.S. Treasury would no longer sell an ounce of gold for the fixed price of $35 per ounce to foreign governments. In anticipation of the gold window being closed in 1971, gold prices did begin to slowly float freely, starting around 1968.

We believe that using silver as a proxy for gold prior to 1968 makes sense, but we want to be clear that no proxy is perfect, and if gold had traded freely, obviously the price of gold could have been dramatically different than what is illustrated. Gold and silver do have a kindred connection of sorts, though. Both have routinely been used as money throughout history. Chart A shows the rolling three-year correlation between gold and silver, since 1968.

Through much of golds' history of being official money in the U.S., silver has been too.From America's earliest years in the 1700s, official money was counted as a fixed combination of gold and silver. By the 1870s, however, with the signing of the Coinage Act of 1873, silver slowly began to lose its official status as fixed money. This allowed the price of silver to float more freely, which can be seen in the chart below. Silver may have lost its official money status in the U.S. in 1873, but many individuals still believed in silver as money and bought it as such for decades after.

Chart A. Silver and Gold Correlation


Graph comparing the price of gold to the price of silver and its 3-year rolling correlation. Contact your Relationship Manager for more information.

Sources: Bloomberg, Wells Fargo Investment Institute. Monthly Data: 1/31/1968 - 1/31/2017. Dates selected to show all available data once gold began to float freely. Past performance is no guarantee of future results.

Chart B. Gold and Silver versus Commodities (1914 – present)



Graph comparing gold and silver to the Commodity Composite Index from 1914 through 2016. Contact your Relationship Manager for more information.

Source: Bloomberg, Prices by G.F. Warren and F.A. Pearson, Bureau of Labor Statistics (BLS), Bureau of Economic Research (NBER), Kitco, Wells Fargo Investment Institute. Data Sample; Monthly where available, yearly otherwise. 1/31/1914 - 12/31/2016. Values shown in log scale. Indexed to 100 as of 1/31/1914. Past performance is no guarantee of future results.

image of gold bars

Next in the "Focus on Gold" series:

Gold versus Other Assets