We recently had a very confused client call us inquiring about Gold movements. He had read that a large gold deposit had recently been discovered, but the price of Gold on that day was headed up, up and away. Such direction seemed to fly in the face of that whole supply/demand thing that most of us have been taught over the years. The discovery meant more Gold to go around, so, in theory, shouldn’t it have become cheaper? As we tried to explain to the client, the problem here is that Gold rarely plays by the rules.

There are a lot of basic assumptions that get tossed around when people try to evaluate Gold movements- and it’s not just about supply and demand. Everyone wants to see a relationship to something else- some kind of indicator to help them gauge the direction of the barbarous relic’s next move. To put the debate to rest, we decided to put these assumptions to the test.

First up, we tackled the basic supply and demand conundrum. We pulled news reports on major supply side news for Gold going back to 1990. On the corresponding dates, here’s how Gold prices happened to move. We’re telling you right now- past performance is not necessarily indicative of future results with Gold price movements. If this piece doesn’t make you a believer in that idea, we don’t know what else to tell you.

The bulk of the news had to do with finding new Gold deposits (read: more supply), though one article pertained to the brewing of the Bre-X mining scandal between 2006 and 2008 (in red). As you can see surveying the chart, supply news rarely correlates with price movements the way one might expect. The general reason for this is that Gold supply is usually pretty ample no matter what, and discovery news is typically not big enough to make a huge impact in one direction for another with supply. But what about demand?

That brings us to the second common assumption- that Gold might swing in tandem with or in the opposite direction of stock market moves. The general idea here is that investors may, in an attempt to boost or diversify their portfolio, turn to Gold, boosting demand and driving up prices. So, of course, we had to test the idea. First we looked at the top ten daily percent swings in the S&P 500 back to 1990. For this chart and all others in this piece, Gold daily percent changes are represented with the golden colored bars (clever, right?).

Again, not exactly a strong relationship here. But what about the ten worst days of movement since 1990? Wouldn’t that cause people to flock en masse to a “flight to safety” type investment? Ignoring the fact that we’ve already spent a good amount of time explaining that Gold, due to its volatile nature, is anything but a flight to safety investment (click here for the slew of articles), we entertained the idea.

Sorry to burst your bubble, but there still does not appear to be a strong relationship here, either. To be fair, stocks are not the only game in town when it comes to establishing a need or desire for a “safety” play. Another comparison is often made to the U.S. Dollar. If the strength of the Dollar is falling, the belief is that people will jump ship and run right over to the alternate “true” currency (even if its value is purely sentimental as some assert), whereas a strong Dollar would see big drops in Gold. Again, we looked at the best of days and the worst of days for the U.S. Dollar since 1990. Here’s what we found.

Surprise, surprise- a mixed bag on big days for the Dollar. Unpredictability seems to be the only predictable trend here. But what about days where the Dollar suffered mightily?

Here we see the closest thing to a pattern thus far, with Gold rising to some extent on 8 of the 10 big down days for the Dollar, but even then, it’s not a reliable pattern. Some days saw Gold surging 3.42%, while others witnessed a nearly dismissible .06% gain. Of course, then you have 2009, where Gold lost even more than the Dollar did in one fateful day. In our opinion, the relationship here is not as strong as most think.

Some might argue that the impact of currency valuation is of particular importance when looked at from a few steps back. These folks believe that if inflation is high (particularly in the U.S.) for a stretch of time, we’re going to see Gold move correspondingly during the same time period, so we took the top 10 months of inflation since 1990, and looked at Gold’s movement during those months.

Once again, no pattern to be found. For those still desperate to isolate some kind of relationship somewhere, the go-to argument here would be that isolating the biggest moves in recent history is not necessarily representative of the total relationship between markets or indicators. It’s a nice thought, but it still doesn’t hold water. Since 1990, this is what we found:

Correlation between Gold and both the S&P 500 and U.S. Inflation is low enough to laugh away. We’ll concede that there’s a slight inverse relationship between the U.S. Dollar and Gold, but even there, it’s not a very high one, and when it really matters- when things are swinging at an extreme- it’s not reliable at all.

Bottom line: quit looking for the “golden” relationship between the yellow metal and the rest of the world. Quit calling it a flight to safety investment. In particular, remember that futures trading is complex, and, given the fact that most of our traditional assumptions about Gold are incorrect, it’s probably best to leave the trading to the professionals.