Countercyclical reactions of gold to extreme market slumps

Gold is an integral part of many investor portfolios, as the precious metal shows no correlation to stocks or bonds in “normal” market phases. The situation is quite different in times of crisis, when the correlation of gold to stocks shifts from a neutral position to a negative one: gold and stock prices tend to move in opposite directions. A new study by Incrementum AG looks back at the degree of this activity by comparing the New York stock index S&P500 with the development of the gold price in US dollars at times of particularly strong market slumps.

Analysis of 15 US stock market crashes from 1929 to 2022  

Although there is no exact definition, analysts generally understand a stock market crash as a sudden, broad-based drop in stock prices of more than 10 per cent within a market. Based on this assumption, the study examined 15 US stock market crashes, starting with the 1929 New York Stock Exchange crash, a major trigger of the Great Depression. The end point of the study is June 2022, marking the lowest level of the S&P 500 since the beginning of the year. In 14 of these cases, gold outperformed the index in direct comparison in the mid to high double digits, and in one case saw a triple-digit gain of 185.67 per cent.

Gold overcompensated for index price losses in many cases

Of the 15 S&P 500 index declines examined, the precious metal was able to significantly overcompensate for the price losses in nine cases with gains of up to 137.47 per cent, and at least neutralise them in one case. In three cases, gold performed positively but fell short of compensating for the index price losses. In one case, the gold price even decreased. On average, however, it overcompensated for the losses of the S&P 500 index by 8.87 per cent on the 15 dates analysed. While the Incrementum AG study is a purely empirical observation, it does allow some assumptions on the possible behaviour of gold in future market slumps.