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If you own gold, you’re basically short stocks

Gold and the stock market have never quite seen eye to eye, but recently the relationship has become one of outright antagonism. That means an investor looking to hedge against a potential market drop could do much worse than picking up some gold.

Here are the numbers: Since the beginning of the year, the 60-session correlation between the (daily changes of the) S&P 500 and gold has sunk from 0.18 to -0.49.

Since correlations run from 1 to -1, with 1 representing the correlation of an asset with itself, -1 indicating an exactly opposing relationship and 0 meaning perfect indifference, this is a huge swing that would appear to indicate a big change in how gold and stocks are interacting.


Correlations, especially those that use short time spans to measure the relationships among volatile assets, are notoriously squidgy. Yet when the 60-session correlation falls to the lowest level in at least 10 years and stays in that range, it is a decent indication that something notable is underway.

To be sure, the 10-year note is experiencing a more deeply negative correlation with the S&P; over the past 60 days, that figure is -0.63. However, gold makes a much more efficient hedge due to its greater volatility. The beta measure, which uses both correlation and a comparison between the volatility measures of two different assets, tells us that gold has a beta of -0.6 to the S&P; the far less volatile 10-year note has a beta of -0.24.

Translation: For every 10 percent stocks fall, gold should be expected to rise 6 percent, while 10-year note futures should only be expected to rise 2.4 percent.

That means that for those who are nervous about the market and hold a broad portfolio of large-cap stocks, gold could make for a prime hedging candidate.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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