Fool’s Gold? Or Are You a Fool Not to Own It?

A burgeoning question these days seems to be surrounding gold and the worthiness a position the shiny metal would have in a balanced portfolio in today’s market.  It seems like there are many opinions out there regarding this and I would offer one here that seems to be rarely brought up when the “experts” discuss this smoldering topic.

First, it is necessary to get some myths about gold out of the way.  It is not a currency.  It cannot be used in daily life.  It will not be the “standard” for monetary calibration anytime soon.  It cannot save you when the world ends and you have it sitting next to the guns and canned food you stockpiled while everyone else was out enjoying what remained of their lives.

That said, gold does have a value – but only if it behaves according to what I believe are the best efforts of gold, which is non-correlation benefit it can bring to a portfolio.  These days with all the government and Fed intervention both here and overseas, a lot of assets that once acted on their own, now correlate.  That diminishes the reason to hold them together in a portfolio.  The reasons for this are many – however, they primarily lie in the fact that when there is massive liquidity intervention in the free markets (as there has been since the great recession of 2008), certain trades get very crowded and money tends to follow other monies – no matter where it is going.  This leads to higher prices but also more correlation between previously disconnected asset classes.

When I mentioned that gold needs to “behave” – I speak simply of the analysis of the precious metal to stock and bond prices.  In the past, the best money management strategies have benefited when gold does not act (as lot of things do now) like stocks or bonds, but on its own, ironically, almost like a currency does.    This attractive characteristic has come to pass in many uncertain and economically challenging environments when I have been managing money – including the difficult market environment of 2005, during the crash of 2008 and during the European meltdown (part I) of 2011.  While these are big events, there have been many other small efforts that gold has posted in other highly volatile market conditions during which it has been a benefit to own.

However, this brings me to today’s environment, where the majority of daily and weekly correlations to stocks and bonds have not been kind to gold and it the days when it does bring the correlation benefit, the impact has been greatly less than it has been in the past.  Is this due to gold being owned (and traded) by a large amount of central banks around the world?  Is this due to gold having doubled in price over the last few years?  Is this due to those ridiculous “cash for gold” commercials?

Whatever the main reason is – the answer is probably that the gold volatility is due to all 3 questions (and a few others) – but the point should be that gold as long as it is correlating with something else you can buy in the markets, it is of little value in a portfolio.  With the latest power shift in Europe and weak economic data in the U.S. sending investors spilling into the streets, gold will have a chance to shine for those who have stuck by it, provided it reverts back to its points of historical benefit.

Scott D. Martin, President and CEO, Accent Asset Management, Inc. A frequent speaker and lecturer, Mr. Martin has been featured in print and broadcast media such as The Wall Street Journal, Investor’s Business Daily, Bloomberg, and CNBC.  He is currently a contributor to Fox Business Network and is a former columnist with TheStreet.com.  

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