Dear Goldman Sachs: What Happens To Gold In A Falling Market? During Interest Rate Hikes?

Goldman Sachs clients have been flooding the bank with questions about how gold performs under two conditions: a falling stock market and rising interest rates. The questions seemingly stem from growing market concern over the impact of future Federal Reserve rate hikes, particularly if the hikes trigger a pullback in the stock market.

The potential for a September rate hike was likely the catalyst behind last Friday’s 2.4 percent selloff in the S&P 500. Now Goldman clients seem to be looking for a safe haven.

History shows that they may have found one in gold. Gold has typically outperformed during extended periods of stock market declines and during interest rate hike cycles.

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Despite a 25 percent jump in gold prices this year, gold has lagged the S&P 500 during the last several years of its bull market. Since the beginning of 2010, gold is up just 18.6 percent compared to an 88.8 percent gain for the S&P 500.

However, if you look back 10 years to before the Financial Crisis, gold has more than doubled the return of the S&P 500, gaining 127.7 percent.

At the very least, investors seem to be interested in a way to hedge against falling stock prices.

Since March, 2007, the SPDR S&P 500 ETF Trust (NYSE: SPY) and the SPDR Gold Trust (ETF) (NYSE: GLD) have virtually zero daily price correlation. 

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