To say that last year was unique would be an understatement as the COVID pandemic swept through the world, causing mass lockdowns in most countries. The pandemic changed the economic landscape forever. Central Banks intervened in many countries with a multitude of stimulus packages across the world. It is fair to say that the pandemic rocked markets in general. The fact that 2020 was an odd year got us thinking that maybe we should look at 2020 from the outside in in terms of a simple correlation matrix to see where the anomalies of 2020 were and what stayed similar in the year when tested against the mean of the previous years.
Correlation Matrix 2011 – 2019
From the above table, a couple of correlations stand out immediately, and that is the strong negative correlation that the USD/ZAR and Gold and Platinum had for the period. This makes sense as a weaker dollar increases the value of other countries currencies. This increases the demand for commodities, including Gold. It also increases prices. When the U.S. dollar starts to lose its value, investors look for alternative investment sources to store value. Gold is an alternative. The Rand is also seen as a commodity currency which will also move inversely should the Gold price increase. The correlation between Gold, Platinum and the Rand is quite significant, while the rest of the correlation could be described as mediocre at best.
Correlation Matrix 2020
From the start, we see that Gold enjoyed a positive correlation with the U.S. dollar, and this makes sense as we saw the highest Rand/Gold price ever recorded. The Rand, however, continued to fight back after the initial loss in value when the lockdown was first introduced in South Africa. We saw a new record high against the U.S. dollar of R19.3500 against the U.S. dollar. The fact that the Platinum price is negatively correlated could be due to the fall in demand of Platinum as economies were locked down and little in the way of production happened. The same can be said for Palladium and Rhodium against the Rand.
Taking a step back, the snapshot of 2020 clearly shows us what happens during a pandemic where economic standstill and the economic principle of supply and demand come to the fore. The positive correlation in Gold also supports the fact that there was a run into Gold as the pandemic put everybody on the back foot and rather run to a safe haven than risky assets. This only proves that Gold is truly a safe haven when there is fear in the markets.