Increasing Correlation of Gold, S&P 500 May Reverse Before QE3

Recently there’s been an increase in correlation between gold and the S&P 500 index. While this may be partly explained by investor expectations for imminent stimulus from the U.S. Federal Reserve in the form of a third round of quantitative easing (QE), a breakdown of that correlation may be needed before the Fed undertakes action.

Looking at the chart, at right, gold has been overlaid with the S&P 500 index and the Federal Reserve’s Total Assets. The chart’s lower panel shows the correlation between gold and the S&P 500 while announcements of quantitative easing have been marked with horizontal red lines. Note the strong negative correlation that existed between gold and the S&P 500 during the decline in 2008 as investors flocked to gold, which is viewed by many as a safe haven in times of crisis.

Read more>>

Bloomberg BRIEF Newsletters