S&P / TSX Composite Index and Gold
The relationship between Canadian stock valuations and the price of gold is not widely debated. The standard view is that the yellow metal is linked to the U.S. equity market, if at all. However, the TSX is dominated by commodity companies, so the index may be correlated to gold prices, at least in theory. As a reminder, Barrick Gold Corporation, which is the largest gold mining company in the world, is listed in Toronto. So let’s analyze the link between the price of the yellow metal and the S&P/TSX Composite Index.
Indeed, as the chart below shows, there is positive correlation between these two asset classes, and it is actually quite strong (about 0.75). In particular, there was a bull market in both gold and the Canadian index in the 2000s, interrupted by a correction after the bankruptcy of Lehman Brothers.
Chart 1: Gold prices (yellow line, left axis, London P.M. Fix, weekly averages) and S&P/TSX Composite Index (green line, right axis, weekly averages) from 1980 to 2017.
However, correlation does not say anything about causation. Does the Canadian stock market move gold prices or vice versa? We believe that the latter scenario is more probable. As the Toronto Stock Exchange is dominated by energy and materials sectors (they combine account for about one third of the index), fluctuations in commodity prices can move the index. Gold and silver are important commodities for the Canadian stock market, as more than 50 precious metal mining companies are traded on the TSX.
S&P / TSX and Silver
As one can see in the chart below, there is also positive correlation between silver prices and the S&P/TSX (it should not be surprising, given that silver prices are very closely linked to gold prices), although weaker than in the case of gold (about 0.60). The most clear period of co-movement was again the 2000s, but there were also periods of negative correlations or independent behavior, for example due to different specific developments in the silver market (see: Silver Thursday).
Chart 2: Silver prices (blue line, left axis, London Fix, weekly averages) and S&P/TSX Composite Index (green line, right axis, weekly averages) from 1981 to 2017.
As in the case of gold, it seems that changes in silver prices affect the TSX through profitability of the mining companies, rather than vice versa. Gold and silver often act as safe-haven assets and portfolio diversifiers, but against the crashes in the U.S. stock market rather than in its Canadian counterpart.
We encourage you to learn more about the precious metals market – not only about the link between the S&P/TSX and gold and silver, but also how to successfully use both silver and gold as an investments and how to profitably trade them. A great way to start is to sign up for our gold newsletter today. It’s free and if you don’t like it, you can easily unsubscribe.