Gold’s Diversification Power Looms Large in Market Uncertainty
Posted By | December 2, 2018
The U.S. equities markets have been showing signs of weakening for some time now. Even investors who’ve been dedicated to investment exclusively in stocks are aware of the landmines that now seem to be popping up everywhere.
The folks who are dedicated to equities may continue to hope this time will be different somehow, that a record-length bull market will just stay a bull market for the rest of their lives, but deep down they know the truth: it has to come to an end. Not only that, chances are excellent it will come to an end in a big way, perhaps even in the form of a bear market that sees equities drop at least 50% from where they are right now.
We know the culprits. Years of insanely low interest rates designed to energize the economy (and juice up the stock market) have given way to rising inflation and a climate of higher interest rates. Also, the outlook for trade looks dim, because key tariffs remain in place with little hope of disappearing anytime soon. Another market antagonist is geopolitical discord, which is expected to remain prominent for the foreseeable future.
And so, since the beginning of the year, the markets have been hitting investors with tremors that suggest a major seismic shock is on the way. After dropping just over 8,100 points in August, the NASDAQ Composite has been in correction territory for weeks now, and the Dow Jones Industrial Average and S&P 500 also have demonstrated great vulnerability throughout this year. The bottom line is that markets have, for some time, been giving a strong indication that big trouble is lurking for investors, even though trouble has managed to remain at bay up to now.
In light of the gathering storm clouds, how should you proceed as a prudent investor? One important and potentially profitable step you can take is to ensure your portfolio is effectively diversified.
You Cannot Truly Diversify Within the Same Asset Class
Effective diversification has to be genuine. Some portfolios have the appearance of diversification, but are not truly diversified.
For example, many investors believe themselves to be diversified because they have foreign stocks as well as U.S. stocks, or they own shares of utility companies in addition to their shares of tech giants such as Microsoft and Facebook. Those are not examples of true diversification. Foreign markets tend to rise and fall with U.S. markets, and when equities are hit by significant volatility usually no industry or sector of the economy is spared.
Effective diversification is achieved when any two assets in a portfolio are fundamentally uncorrelated. This means they tend not to move in the same direction at the same time. Numerically, assets in perfect correlation have a coefficient of 1.0; assets that are entirely uncorrelated have a coefficient of 0.0.
One of the great advantages of using physical gold to help achieve effective diversification is its uniformly low correlation with a variety of common assets. Take a look at this table, which illustrates gold’s correlation with key assets and indices:
Correlation of Gold with Select Assets and Indices
(Data Courtesy of PortfolioVisualizer.com)
|CRSP US Total Market Index1||CRSP US Small Cap Index2||FTSE Emerging Markets All Cap China A Inclusion Index3||ICE U.S. Treasury 20+ Year Bond Index4||MSCI US Investable Market Real Estate 25/50 Index5|
Correlation coefficients indicated represent correlation of gold to each of the noted indices.
As you can see, gold has a very low correlation with stocks overall, as well as with long-term bond investments and even real estate. Moreover, gold’s correlation with the broad U.S. stock market, where so many American investors are predominantly invested, is close to zero. These numbers reflect a low correlation of gold with assets and securities commonly found in retirement portfolios of U.S. investors, and a particularly low correlation with equities.
Physical Gold Investments Crushed Stocks and Bonds in Millennium’s First Decade
Here is another highly illustrative chart that shows how gold performed against the Dow Jones Industrial Average and long-term bonds from the period leading up to the devastating September 11 attacks through the midst of the great global recession:
Performance of Gold, DJIA, and Long-Term Government Bonds, April 2001 to April 2011
(Chart courtesy of StockCharts.com. Long-term government bonds proxied here by iShares 20+ Year Treasury Bond Fund; symbol: TLT.)
Throughout the first decade of the millennium, which was characterized by a great deal of economic and geopolitical upheaval, gold managed to thrive considerably while the more popular asset classes of equities and long-term bonds achieved more modest – and more closely related – results.
It is difficult to overstate the benefits of an effectively diversified portfolio to investors. The S&P 500 dropped an average of 42% during the six bear markets of the last 50 years. Why tolerate the value of your retirement portfolio, including your IRA and/or 401(k), sinking by nearly half if you don’t have to?
To learn more about how physical gold and silver investments could mean the difference between actually achieving your long-term retirement objectives and simply getting by in your Golden Years, call Augusta Precious Metals at 855-242-4121 and speak with one of our highly qualified gold and silver professionals. This kind of genuine diversification could be the “insurance” you need to get prepared and gain a little peace of mind as you watch the latest bull market deteriorate. And if you want to maximize the benefit of owning physical precious metals, ask your Augusta representative about the tremendous potential offered by ownership of a physical gold and silver IRA.
1 As proxied by the Vanguard Total Stock Market ETF (Symbol: VTI)
2 As proxied by the Vanguard Small-Cap ETF (Symbol: VB)
3 As proxied by the Vanguard FTSE Emerging Markets ETF (Symbol: VWO)
4 As proxied by the iShares 20+ Year Treasury Bond ETF (Symbol: TLT)
5 As proxied by the Vanguard Real Estate ETF (Symbol: VNQ)
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