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S. Hamsini Amritha

After moving on predictable lines for several years, gold, oil and stocks have seen their three-way relationship go awry in the recent months.

In the recently halted market rally, the Sensex shot up by 21 per cent (November 20, 2008 to January 6, 2009) even as global stock markets stabilised on the back of ‘stimulus’ packages and rate cuts. Normally, this would have been a cue for gold prices to cool off. Instead, gold prices actually rose by 13 per cent in this period.

Crude oil, from November 20 actually plunged 11 per cent, taking the opposite direction to gold prices. These trends are at variance with the historic movements in gold prices. Traditionally, prices of gold have moved hand in hand with crude oil, as gold is considered an inflation hedge. Similarly, gold has usually risen when stocks have performed badly; as gold is viewed as a substitute for risky assets like stocks.

Gold prices have usually firmed up in the midst of severe stock market corrections. Take for example September 2001 (9/11), when markets worldwide experienced turmoil.

While the Sensex tumbled by over 12 per cent for the month, gold posted a gain of over 6 per cent. Or take the case of May 17, 2004 when the Sensex registered its biggest ever single day fall of 11.4 per cent; prices of gold went up by 1.7 per cent from $373 to $380 an ounce that day.

Similarly, history suggests that gold enjoys a direct relationship with crude oil prices. Between January and July 2008, steadily climbing oil prices propelled gold higher. If a barrel of crude oil rose from $94 to a record $148 a barrel by July, gold too hit a new record.

One explanation for they move in tandem during this period could be that price rises were fuelled by the same speculative forces. On March 17, 2008 when the Sensex fell by 6 per cent after shedding close to 950 points, gold touched its all-time high price of $1,024 an ounce, gaining close to 3 per cent.

But as oil corrected sharply in line with the rest of the commodity pack, the relationship between oil, gold and equity began to defy the usual pattern.

In recent months, stock market corrections have not acted as a material trigger to gold prices. On the big Sensex plunge of October 24, 2008, when the Sensex fell 11 per cent, gold posted a loss of 1.5 per cent. It was also during this time that gold posted its biggest weekly loss of 12 per cent this year.

All this suggests that investors looking to switch between stocks and gold to capitalise on their relative returns may have to rework their equations quite a bit.

More Stories on : Gold & Silver | Petroleum | Stock Markets

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