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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