“May was a tough month for U.S. stocks, and June isn’t starting off much better. The real damage to capital markets, however, only becomes visible when viewed through the lens of asset price correlations,” Colas wrote. “Broadly speaking, the 2011 rally in risk assets, even with its pullbacks and stutter steps, had driven correlations consistently lower. That is the sign of a healthy capital market.”
However, a rocky May for markets boosted market correlations, with the largest pops in correlations to stocks in gold and silver.
“Precious metals as an asset class should have no correlation to financial assets such as stocks, and earlier in the year that’s precisely how SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust traded,” Colas said. “Last month, however, the correlations of gold and silver to stocks spiked … There were plenty of exogenous factors last month, from changes in margin requirements to an atypical strengthening of the U.S. dollar, so we are going to give gold and silver a ‘mulligan’ for May.”
iShares Silver Trust
Full disclosure: Tom Lydon’s clients own SLV.