Most recently—say, in the past month—gold's equity correlation has become strongly positive while gold's correlation to bonds moved dramatically in the negative direction.
Correlations To COMEX Spot Gold
(Through 09-Feb-10)
|
|
S&P 500 |
MSCI ACWI |
BarCap Agg |
|
Last 30 days |
0.77 |
0.79 |
-0.51 |
|
Last 60 days |
0.60 |
0.71 |
-0.21 |
|
Last 90 days |
0.53 |
0.61 |
-0.20 |
|
Last 180 days |
0.48 |
0.56 |
-0.13 |
|
Last 360 days |
0.02 |
0.18 |
0.00 |
|
Last 431 days |
-0.01 |
0.15 |
0.00 |
These assets have been particularly reactive to vagaries in the U.S. dollar's value. The dollar's been resurgent as capital flows—particularly to U.S. Treasurys—left the equity markets shaken and caused investors to shun gold in favor of the greenback. Essentially, fear of the dollar has been trumped by fear of everything else. This caused not only disparate performance in different asset classes, but breakdowns in the relationships between them.
"All fine and good," I hear you say, "But, what's this mean to me? How's this affecting my portfolio?"
So far, the tightening correlation to equities hasn't been that costly; after all, equities over the past year haven't been a bad place to be, but it could become more noisome if it persists. Gold hasn't lost its diversifying power yet. In a model portfolio consisting of 25 percent domestic stocks, 25 percent foreign equities, 40 percent domestic fixed income and 10 percent gold, the metal's ameliorative influence can be clearly seen over the past couple of years, but is now starting to wane.
Model Portfolio Performance (Rebalanced Monthly)
Portfolio owners are naturally more concerned when correlations tighten between losing assets. Gold sinking alongside stocks is viewed as a problem; metal piggybacking on a climbing equity market doesn't seem so bad.
Only time will tell how long the current alignment persists. Investors and their advisers, like bus riders on a novel route, can look back on their maps to chart the historic course of gold/stock correlations and take comfort in knowing that these coefficients will likely revert to their means. Still, portfolio owners should be prepared for some back-and-forth along the way.
