So far this year gold has performed quite well, with the London PM price up about 10% YTD (blue line). The 2014 YTD return is the second best since 1984, lagging only 2008.
The return of gold
Question: is the return of gold early in a year an indication of how well equities will do for the reminder of the year?
Before answering the question, here’s what the Dow Jones Industrial Average has done by year since 1984 through March 7th.
The chart shows that the Dow Jones Industrial Average is off to a weak start by historical standards, with the YTD through March 7th at about 1%.
Now to address the question, the following is the return of gold by year overlaid with the return of the Dow Jones Industrial Average.
It’s impossible to see any connection with so many clusterings of years.
Here’s a look for just the past couple of years.
Looks like there might be some connection.
In 2012, gold was up about 10% at this time, and ended the year up about 8%, while the Dow Jones Industrial Average started the year up 3% and ended 2012 up about 5%.
In 2013, gold was up about 5% at this time, and ended the year down 27%, while the Dow Jones Industrial Average started the year up 11% and ended 2013 up 27%.
More analysis is needed.
The following table shows the YTD return for gold and the Dow Jones Industrial Average on March 7th and December 31st.
The different columns represent the percentage difference for each commodity from the March number to the year-end number.
The colors in the different column represents whether there was a reversal in fortune from the early March returns. The color scheme goes from red to green, with red representing a negative turnaround, meaning the return got worse from March 7th to the end of the year, and green representing a positive turnaround, meaning the return got better from March 7th to the end of the year. The lighter shades of the two colors captures the scaling.
Does it look like red cells for gold are correlated with red or green cells for the Dow Jones Index?
It’s still somewhat difficult to see.
To answer the question for good, the following is scatterplot between the performance of gold from this time of year to the end of the year and the performance of the Dow Jones Industrial Average over the same period.
The gray line represents the correlation between the two.
Perhaps surprisingly, the two are completely not correlated (p-value of 0.99), as is shown by the almost completely horizontal regression line.
Overall, if you’re looking for YTD indicators that might provide some insight into how the equity markets will perform, the YTD returns of gold are not the place to look.