gold investment, silver investment

Precious metals investment terms A to Z

S&P 500

As the jokes goes, the S&P 500 crashes are worse than a divorce. An investor can lose half of his money and the wife would be still there.

The Standard & Poor’s 500 Index (S&P 500, or just S&P) is an index of 500 largest U.S. corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. The index was introduced in the 1923, but the S&P 500 in its present form began on March 4, 1957. Contrary to the Dow Jones Industrial Average, the S&P 500 is a market value weighted index which includes 500 companies across all industries and both growth stocks and value stocks. For these reasons, the S&P 500 is one of the most commonly followed equity indices, and it is believed to be one of the best representations of the U.S. stock market.

S&P 500 and Gold

The relationship between stock valuations and the gold price is widely debated. The standard view is that these two markets are negatively linked: when the stocks go up, the yellow metal dives, and vice versa. This is indeed often the case, as the gold is a safe haven, so when traders go into defensive mode, they may prefer gold to relatively risky stocks. Clearly, as the chart below, there have been many periods when stocks and gold have been moving in opposite directions. This is why gold is also a good portfolio diversifier, as it provides a hedge against the S&P 500 Index. Hence, it is a good idea to add some gold to the equity investment portfolio.

Chart 1: Gold prices (yellow line, left axis) and S&P 500 Index (green line, right axis) from 1971 to 2017.

Gold and S&P 500 Index

However, the chart, which presents the price of gold and the S&P 500 Index, also shows periods of co-movement (think about the 2000s). It means that the gold-stock relationship changes over time, depending on external conditions, especially on macroeconomic factors. Hence, although there is often a shift of funds from equities to the gold market in times of stock crashes, the link between the S&P 500 and gold is complex and dependent on external macroeconomic factors.

The best example might be the co-movement of the S&P 500 and the gold prices during the 2020 coronavirus crash. As the chart below shows, the stock market and the gold market plunged in tandem in March 2020 just to rebound together in April. It seems that when the stock market went down, investors sold gold holdings to raise cash and cover margin calls. 

Chart 2: Gold prices (yellow line, right axis) and S&P 500 Index (green line, left axis) in 2020.

S&P 500 and Gold Chart

S&P 500 and Silver

As one can see in the chart below, there is no clear correlation between the silver prices and the S&P 500 Index. Although both asset classes moved in tandem during most of the 2000s, there were also periods of negative correlations or independent behavior, for example due to different specific developments in the silver market (see: Silver Thursday). Hence, as silver prices are very closely linked to gold prices, this metal also serves as a safe-haven asset and a portfolio diversifier, as it hedges against the S&P 500.

Chart 3: Silver prices (blue line, left axis) and S&P 500 Index (green line, right axis) from 1971 to 2017.

Silver and S&P500 Index

We encourage you to learn more about the precious metals market – not only about the link between the S&P 500 Index and gold and silver, but also how to successfully use both silver and gold as an investments and how to profitably trade them. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.

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