As A Hedge, Gold's Now A Bust

Real-time Monetary Inflation (last 12 months): 2.3%

Professional portfolio managers learn very early in their careers the fundamentals of hedging. If there's a need to tactically reduce exposure to a particular asset class, they learn to find contrary investments, something that "zigs" as other holdings "zag."

For a long time, the "zig" for domestic stocks was supplied by gold—in myriad forms ranging from bullion to mining stocks. Recently, gold and domestic equities have spent more time waltzing together than marching to different drumbeats.

Take a look at the 30-day rolling correlation of COMEX spot gold to the S&P 500 Composite: It's been on the upswing for the past year and recently spent more than a week at 80 percent. Eighty percent! Granted, that was only a week, but the trend is unmistakable. As this is written, the correlation has backed off, but only to 70 percent.

Correlation: COMEX Spot Gold's Vs. S&P 500

Gold bullion, in fact, tracks U.S. blue chips to a tighter degree than gold mining shares. The correlation coefficient describing the relationship between the index underlying the Market Vectors Gold Miners ETF (NYSE Arca: GDX) and the S&P benchmark is now 65 percent and holding.

Correlation: Gold Mining Stocks Vs. S&P 500

There's a cautionary tale in this. Your portfolio might be doing well as it zigs along with gold playing a supporting role. The enhancement your equity portfolio enjoys, however, can quickly turn to leveraged loss when things begin to zag. Keep a watchful eye on the confluence of risk in the current market.

Very scary stuff... Gold and equities are NOT supposed to rise in tandem... something is very wrong... this monetary experiment is going to end terribly and the average American is going to suffer the most. Submitted by Bulleri on Fri, 2010/03/12 - 2:18am » reply |