Much has been written and said about the relative level of the stock market and Gold’s Value.

It is not possible to state that gold’s value changes as a result of activity within the stock market and it is also not possible to state that the level of the stock market changes as a result of activity in the gold market.

It is more accurate to say that gold reacts differently to factors that impact the stock market. In short, the events and conditions which tend to result in a rising gold price also tend to result in a falling stock market.

Whereas high inflation, credit and debt crises, bank failures, currency crises, commodity price shocks and international tensions tend to negatively impact the stock market, gold has historically held its value, or even risen, during such conditions.

It is important to point out that gold and stocks are not perfect counterweights to each other. There are plenty of trading days in which both the price of gold and the stock market have gone up. This can even turn into a trend that can last weeks, or even for a few months.

But the historical evidence is overwhelming. Over the long-term, gold and stocks tend to move in opposite directions. This has been born out in research done by the World Gold Council for decades which shows that there is indeed a negative long-term correlation between gold and stocks, as measured by all of the major stock indices, namely the Dow Jones Industrial Average, the Standard & Poor’s 500, and the Wilshire 5000.

Whether the stocks being compared to gold are large blue chips or small, aggressive growth companies, the correlation to gold is still negative over the long-term.

For that reason, gold is an excellent portfolio diversifier for a portfolio consisting of stocks, whether the portfolio contains just a few blue chips or a broad array of a cross section of the entire stock market.

This alone is a compelling reason to buy and own gold and history provides us with important examples of this phenomenon.

  • In 1973-74, the Dow Jones Industrial Average fell by some 45%, the worst bear market in US stocks since the great depression. This bear market was caused partially by the onset of “stagflation.” During this same period, the price of gold as measured by the London Fix rose from $65 per ounce to $195 per ounce, an increase of more than 200%.
  • In October of 1987, a bear market in stocks culminated in a crash and decrease of more than 30% in the US stock market. During that same month, the price of gold exceeded $500 per ounce, at the time its highest level since 1983.
  • In the 4th quarter of 2008, the US stock market was wracked by the shock waves of the subprime mortgage crisis, bank and other financial institution failures and fears of a credit/debt crisis as the US monetary and financial systems were shaken to their very foundations. Thousands of points disappeared off of the Dow. At the same time, the price of gold exceeded $1,000 per ounce for the first time ever.

It is impossible to accurately and repeatedly forecast the twists and turns of the stock market or the gold market. Because these two markets are negatively correlated with one another over the long-term, it makes sense to include gold in a properly diversified financial plan in order to be constantly vigilant against the possibility of a bear market in stocks and gold’s value.