With the gold space becoming more prominent in Australia, it may be beneficial for investors to understand the unique relationship between the gold price and the ASX.
The two sources of trade can push and pull one another, although in general the price of gold tends to indirectly follow the movements of the ASX.
Gold’s relationship with the ASX is unique in that the metal indirectly follows the movements of the market, as opposed to resources like oil and gas. The yellow metal tends to be viewed as a counter-cyclical asset, which means that its value increases during market downturns.
Due to gold’s large global presence and high intrinsic value, the precious metal is often seen as a universal currency. When the outlook of the equity market looks bleak, or corporate earnings are destined for doom, investors will flock to the precious metal.
On the flip side, when the economy, and in turn the ASX, is on the rise, investors tend to abandon the yellow metal in favor of equities.
However, this is not to say that the relationship between gold and the ASX is a negative one. It is more of a give-and-take commitment. The metal continues to have an impact on jewelry and jewelry-related products. Additionally, gold is used in dentistry, aerospace, and electronics — all of which affect publicly traded companies and as a result the ASX.
This relationship between the gold price and the ASX has turned the precious metal into something of a hedge when it exists within an individual’s portfolio as a source of diversification, which is when market participants hold investments that are not related to one another.
Since gold has a history of having a negative correlation to stocks, bonds, and other financial instruments, it becomes important that investors get diversified by owning a portfolio that combines gold with stocks and bonds to reduce both volatility and risk. While it is true that the yellow metal goes through times of volatility, its spot price has always maintained its value over the long term.
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