What Is the Secular Relationship Between Gold and the Stock Market?
Gold and commodity prices have demonstrated a consistent inverse relationship with the US stock market over long periods. This relationship forms the foundation of secular market cycles that typically span decades rather than years. When gold and commodities enter a secular bull market, the US stock market is usually experiencing a secular bear market, and vice versa.
A secular bull market involves consistently trending higher with higher highs for over a decade. For example, the S&P 500's advance from 1982 to 2000 represents a classic secular bull market in equities. Conversely, a secular bear market involves a long period without sustained higher highs, typically moving sideways for over a decade, as seen in the stock market from 2000 to 2013.
"The key to understanding secular relationships is recognizing that they operate on a much longer timeframe than typical market cycles," notes market historian Russell Napier, who points out that these relationships can persist for 15-20 years.
Over shorter periods (a few years), these asset classes can move in various combinations—both rising, both falling, or moving in opposite directions. The Commodity Research Bureau (CRB) index, which tracks a basket of commodities including gold, has historically shown this inverse relationship with major US stock indices over long timeframes.
Recent analysis from Goldman Sachs shows that gold and the stock market has maintained an average -0.43 correlation to the S&P 500 during periods of high inflation since 1971, highlighting this inverse relationship during key economic stress points.
How Do Historical Data Demonstrate the Gold-Stock Market Relationship?
Major breakouts in gold typically occur shortly after secular peaks in the stock market, creating a pattern that has repeated throughout modern financial history. This relationship becomes clear when examining specific historical examples.
The US stock market's breakout in 1982 occurred shortly after gold's peak in 1980, when the precious metal reached $850 per ounce. Similarly, the S&P 500 broke out from a 13-year base in 2013, just two years after gold's peak in 2011 at $1,920 per ounce.
Going further back, gold's historic move beginning in 1971 (when it surged from $35 to over $800) began a few years after the S&P 500 peaked in the late 1960s. The Dow Jones Industrial Average reached 1,000 in 1966 but wouldn't decisively break above that level until 1982—a 16-year period when gold outperformed dramatically.
Research from the World Gold Council confirms that the precious metals market historically performed best during secular bear markets in US stocks. During the 1970s, while the S&P 500 delivered negative real returns, gold produced average annual returns exceeding 30%.
"The relationship between gold and the stock market is particularly strong when measured in real terms, accounting for inflation," explains economist Lyn Alden. "During the 1968-1982 period, the S&P 500 lost nearly 70% of its value in inflation-adjusted terms, while gold gained over 1,000%."
When Do Gold and Stocks Experience Overlapping Bull Markets?
While the inverse relationship between gold and stocks is the dominant pattern, three major historical overlaps have occurred where both asset classes thrived simultaneously.
From 1942-1951, commodities remained in a secular bull market until 1951 while stocks began a significant uptrend from 1942. This period coincided with post-WWII reconstruction and the beginning of the baby boom, creating simultaneous demand for hard assets and productive capital.
The 1960s presented another interesting overlap. Metals prices and mining stocks performed exceptionally well alongside the broader stock market. The Barren gold mining index gained over 300% from 1962 to 1968, while the S&P 500 also rose significantly, though at a more modest pace.
We may currently be witnessing a third major overlap. The S&P 500 continues making higher highs while gold broke out to new all-time highs in March 2024, surpassing $2,200 per ounce for the first time. This pattern resembles the mid-1960s market environment, with mining stocks outperforming the general market.
Notable cyclical periods when precious metals and US stocks trended together include 1932-1937 (post-Depression recovery), 1971-1973 (Nixon shock), and 2002-2007 (housing boom). During these intervals, both asset classes benefited from expansionary monetary policies and economic growth phases.
Data from the Federal Reserve Bank of St. Louis shows that during these overlapping bull markets, real interest rates were typically declining but remained positive—creating a "sweet spot" for both asset classes.
What Was Unique About the 1960s Gold-Stock Market Relationship?
The 1960s present perhaps the most fascinating historical parallel to today's market conditions. Gold stocks broke out of a three-decade base in late 1964 and enjoyed one of their strongest cyclical advances while the broader market continued its upward—albeit slower—trajectory.
The S&P 500's bull market slowed considerably in the early 1960s, gaining only 50% from the end of 1961 to the end of 1968. During those same seven years, gold stocks gained over 300%, demonstrating remarkable outperformance.
The numbers become even more striking when examining specific timeframes. From November 1963 to their 1968 peaks, the Barren gold mining index surged an astonishing 373% while the S&P 500 gained just 56%. This roughly 7-to-1 outperformance ratio showcases how dramatically gold stocks underperform compared to physical gold even when both are rising.
"The 1960s represented a transition period when bonds peaked, stocks slowed, and gold began its ascent," explains market strategist Michael Oliver. "We're seeing remarkable similarities to today's environment."
What made this period unique was the combination of rising inflation expectations, relatively high stock market valuations, and the beginning of monetary instability as the Bretton Woods system came under pressure. The 10-year Treasury yield climbed above 5% by 1966-1967, putting pressure on traditional stock market valuations while benefiting gold miners.
Current parallels include persistent inflation above the Federal Reserve's 2% target, historically high equity valuations, and growing concerns about long-term monetary stability amid record government deficits.
How Does Gold Performance Compare to a Traditional Investment Portfolio?
The gold-to-60/40 portfolio ratio is considered by many analysts to be "the most important chart in gold." This ratio compares gold's performance to a traditional balanced portfolio consisting of 60% stocks and 40% bonds, providing insights into gold's relative strength against mainstream investments.
Strong moves in gold historically occurred when gold outperformed the 60/40 portfolio. When examining historical data, after the gold/60/40 ratio broke above key resistance, secular bull markets in gold continued for 8-9 more years. This occurred notably in 1972 and again in 2002.
From 1972 to 1980, after breaking this key resistance level, gold surged from $65 to $850 per ounce. Similarly, from 2002 to 2011, gold climbed from around $300 to $1,920 after breaking out against the 60/40 portfolio.
Gold is currently close to breaking out of a nearly 10-year base against the 60/40 portfolio. As of early 2024, the ratio sits just below its 2011 peak, suggesting potential for significant outperformance if historical patterns repeat.
"What makes this ratio so powerful is that it accounts for total returns, including dividends and interest payments," explains portfolio manager Ronald-Peter Stoeferle. "When gold outperforms a balanced portfolio including these income streams, it signals extraordinary strength."
If the secular bull market in stocks ends in the next 1-2 years as some analysts project, this ratio could explode higher as in 1972 and 2002. In both previous instances, gold price trends in 2024 delivered more than 8 years of outperformance against balanced portfolios.
What Economic Factors Drive These Secular Trends?
Secular bear markets in equities typically begin with three key conditions: extreme overvaluation, very high ownership of stocks among retail and institutional investors, and rising long-term interest rates due to inflation.
When these conditions emerge, policymakers typically respond with lower interest rates and increased government spending to support economic growth. These policy responses, while aimed at stimulating the economy, tend to be inflationary and highly favorable to gold and other hard assets.
Historical data consistently shows that declining real interest rates (nominal rates minus inflation) create the optimal environment for gold appreciation. When real rates turn negative, as in the 1970s and 2010s, gold tends to outperform dramatically.
Conversely, positive and rising real interest rates coincide with secular bull markets in equities. The great bull market of 1982-2000 occurred during a period of falling inflation and relatively high real interest rates.
Major peaks in commodity prices and inflation (1920, early 1950s, early 1980s, 2011) coincide with troughs in stock market valuations. At these junctures, price-to-earnings ratios reach their lowest points, setting the stage for new secular bull markets in equities.
"What makes the current environment so precarious is the collision of record-high valuations with rising inflation expectations," notes economist Jeffrey Snider. "The Fed faces a dilemma: fight inflation at the cost of asset prices, or protect asset prices at the cost of purchasing power."
Historical research from Bridgewater Associates shows that asset markets deliver their worst real returns when inflation rises above 4-5% and becomes persistent—exactly the environment many economists now predict for the coming decade.
What Are the Current Market Indicators Suggesting?
Current market conditions most closely resemble the early 1900s and mid-to-late 1960s, both periods that preceded significant gold outperformance.
The Cyclically Adjusted Price-to-Earnings (CAPE) ratio, developed by Nobel laureate Robert Shiller, currently sits in the 93rd percentile of its historical range at around 33. For context, the average CAPE ratio since 1881 is approximately 17, suggesting stocks remain significantly overvalued despite recent corrections.
Long-term interest rates are rising and bonds are in a secular bear market (similar to the mid-late 1960s). The yield on 10-year Treasury bonds has risen above 4%, more than doubling from pandemic lows.
Household equity investments are at an all-time high, surpassing the peaks seen in 2000 and 2021. U.S. households currently have approximately 40% of their financial assets in equities, higher than at the peak of the dot-com bubble.
Major financial institutions have significantly reduced their long-term return projections for U.S. equities:
• Goldman Sachs projects just a 3% total return (1% inflation-adjusted) over the next 10 years
• Stifel forecasts a 3% inflation-adjusted annual return over the next decade
• Bank of America expects only 1-2% return per annum over the next 10 years
"These projections reflect the mathematical reality of starting from extreme valuations," explains Rob Arnott, founder of Research Affiliates. "When you pay too much for future cash flows, your returns necessarily suffer."
Meanwhile, central banks globally purchased record amounts of gold in 2022 and 2023, continuing into 2024. This trend signals growing institutional concern about fiat currency stability amid record sovereign debt levels.
How Do Inflationary Secular Bear Markets Affect Stocks?
Contrary to popular belief, conventional stocks are not an effective hedge for secular inflationary cycles. Historical data shows that inflationary secular bear markets (1906-1921, 1968-1982) ended worse for investors than deflationary ones (1929-1942, 2000-2009).
Stocks can initially rise during secular inflationary periods, creating a false sense of security. From 1966 to 1972, the Dow Jones Industrial Average gained approximately 15% in nominal terms. However, when adjusted for inflation, investors actually lost purchasing power during this period.
Persistent inflation eventually erodes corporate margins and results in lower valuations. Companies face rising input costs, wage pressures, and higher borrowing expenses, all of which compress profit margins from their peaks.
In the latter stages of inflationary secular bear markets, the total real return on stocks typically drops to levels from 20 years prior. By 1982, the inflation-adjusted value of the S&P 500 (including dividends) had fallen to levels last seen in the early 1960s.
"The insidious aspect of inflationary bear markets is their stealth," warns economist Russell Napier. "Nominal prices may not fall dramatically, but purchasing power erodes steadily, year after year."
The coming secular bear market is likely to be inflationary and similar to 1968-1982 or 1906-1921. Both periods saw stocks struggle to make meaningful progress for over a decade while gold and the stock market dynamics favored the precious metal. During the 1968-1982 period, the Dow Jones Industrial Average remained below 1,000 for nearly 16 years while gold rose from $35 to $850.
What Signals Confirm a Full Secular Transition from Stocks to Gold?
Two key signals have historically indicated a full secular transition from stocks to gold as the dominant asset class.
The first signal occurs when gold breaks out when measured against the 60/40 portfolio's total return. This breakout happened in 1972 and again in 2002, with both instances preceding major multi-year advances in gold prices relative to financial assets.
The second signal is more dramatic: the S&P 500 falling below its 40-month moving average. This technical breakdown confirms that the long-term trend in equities has reversed from bullish to bearish. During the 1970s bear market, the S&P 500 spent most of the decade below this critical moving average.
The first signal (gold breakout against the 60/40 portfolio) has already occurred in the current market as of early 2024. Gold's recent push to all-time highs above $2,200 has it outperforming the traditional balanced portfolio for the first time since 2011-2012.
"The 40-month moving average represents approximately 3.3 years of price action," explains technical analyst JC Parets. "When markets break below this threshold, it often marks the beginning of a prolonged period of underperformance."
Historical data shows that secular bear markets typically last 10-15 years. If the current transition began with the 2022 market peak, investors should prepare for an extended period of gold outperformance lasting potentially into the 2030s.
Research from Incrementum AG indicates that once the secular trends in gold and stocks fully diverge, gold can outperform equities by a factor of 3-5x over the subsequent decade.
What Macroeconomic Factors Support Higher Inflation Expectations?
COVID-19 and geopolitical tensions have catalyzed a significant reshoring of supply chains, reversing decades of globalization that had kept inflation low. Major corporations including Apple, Intel, and General Motors have announced plans to reduce dependence on extended global supply chains.
Global trade, which kept inflation low by allowing production to shift to lower-cost regions, has peaked after increasing from 35% of GDP in 1985 to 61% in 2008. By 2023, this figure had fallen to around 52% and continues to decline.
American approval of labor unions is at its highest level since 1965, according to Gallup polls. Approximately 71% of Americans now approve of labor unions, compared to just 48% in 2009. This shift in sentiment is already translating to higher wage demands across multiple sectors.
Several factors that contributed to decades of low inflation are now reversing:
• Decreasing globalization and fragmentation of the global economy into competing blocs
• Reduced global trade intensity and rising protectionism
• Labor gaining power after decades of declining influence
• A shift away from economic neoliberalism toward more interventionist policies
"The era of secular disinflation that began in the early 1980s appears to be over," notes economist Charles Goodhart. "Demographics, deglobalization, and decarbonization all point to a more inflationary future."
These reversals are already impacting corporate profits and record profit margins. S&P 500 profit margins peaked at around 13% in 2021 but have begun to decline as labor costs, input prices, and interest expenses rise.
Historical data suggests that during inflationary regimes, profit margins tend to compress by 20-30% from their peaks, creating significant headwinds for equity valuations.
FAQ: Common Questions About Gold and Stock Market Relationships
Is gold always a good investment during stock market downturns?
While gold typically
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