Are gold & crypto-assets worth it?
The conclusion must be that, if you seek to reduce risk with diversification, you have to look beyond listed securities. Traditionally, many investors have sought refuge from this “curse of correlation” in gold. The World Gold Council produced the chart below to illustrate gold’s correlation with the S&P 500.
Correlation of US equities versus gold, commodities and US treasuries in various environments of US equity market performance since 1973*
Source: World Gold Council
*As of 31 December 2021. Correlations based on weekly returns in US dollars for “US equities”: S&P 500 Index; “commodities”: Bloomberg Commodity Index; “US treasuries”: Bloomberg Barclays US Treasury Index; “gold” LBMA Gold Price PM since January 1973 due to US treasury availability of data.
The top section corresponds to the unconditional correlation over the full period. The middle section corresponds to the respective correlations when the S&P 500 weekly return falls by more than two standard deviations (or “σ”) from the average for the period, while the bottom section corresponds to the respective correlation when the S&P 500 weekly return falls by more than three standard deviations. The standard deviation for the S&P 500 is calculated using weekly returns over the full period.
As we can see from the chart, gold is negatively correlated with the S&P 500 when the index is performing badly. And in the good times, it is only slightly positively correlated.
However, investment managers such as David Henry at Quilter Cheviot have been surprised by the lack of increase in the gold price so far this year: “Gold isn’t working”.
One possible reason is that gold may be “heavy, beautiful and reassuring” but pays no income turning investors to other safe-haven assets that do pay an income. That makes it less appealing today, when interest rates are at last rising after a dozen years, driving up the returns on rival safe havens cash and bonds.
“In this environment, the relative attractiveness of a lump of shiny metal, which does not pay you anything, diminishes,” Mr. Henry says.
Some investors are even turning to crypto-assets, however, those may not be a good alternative to gold.
Taking Bitcoin as a proxy for the entire sector, its correlation has become increasingly close to both US mainstream (S&P 500) and tech equities (NASDAQ). According to TradingView, the 90-day correlation between the largest cryptocurrency by market capitalization and the S&P 500, which includes a strong tech component, reached a value of 0.59 on September 9, 2022 (dark blue area chart below). Furthermore, the link between the bitcoin price and the tech-focused Nasdaq stock index has also tightened, reaching a correlation of 0.62 on September 9, 2022, up from 0.31 on August 15, 2022 (light blue area chart below).
Bitcoin’s correlation with S&P 500 and Nasdaq
This should make you think twice about using crypto to diversify your portfolio, that is, on top of the crazy volatility of crypto. Uncertainty surrounding the FTX collapse and its potential fallout pushed Bitcoin prices to new two-year lows of around USD 16’977 as of December 1.
However, Bitcoin is not the only crypto suffering. As of December 1, BTC and ETH are both down above 70%, starting from their October 2021 and November 2021 highs respectively.