Gold’s Correlation to Global Assets
Just posting this here more for reference than anything else as it’s always important to keep track of correlations for portfolio construction….(via the World Gold Council):
Correlation statistics between gold and other assets were similar to those experienced in Q2 2012 (see Chart 2). Its correlation to developed and emerging market equities was slightly higher than normal, but its correlation to global bonds and commodities was lower than in Q2. However, these deviations from long-term averages were not large enough to imply atypical behaviour. In prior quarterly commentaries we have shown how gold’s correlation to equities hovers around zero over the long run, but can fluctuate over shorter periods of time.
In particular, both gold and equity prices moved higher during Q3, leading to an elevated correlation. However, prices were driven higher by different underlying reactions. While both responded to monetary policy announcements and measures undertaken by central banks around the world, equities responded to central banks’ pledges to stimulate economic growth; gold, on the other hand, moved higher encouraged by factors that we discuss in the section titled “unconventional monetary policy and gold”.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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5 Comments
Cullen – what is your position on allocating a percentage of your portfolio to gold? And if so, what is your desired percentage range?
I like gold for its non-correlation, but would never put more than 5% or so in the total allocation. Gold is primarily a disaster hedge like insurance. So it best serves as a hedging component around a core portfolio built for appreciation.
I agree with you on the percentage allocation (I would even go as high as 10%), however I cannot agree with your logic.
The price of gold seems to track global M2 levels more than any other metric. Now, based on your own understanding and interpretation of how the monetary, banking, and economic machine functions, I would venture to guess that continued (albeit perhaps more gradual) increases in global M2 levels is not something you can seriously rule out.
Therefore gold serves as more of a monetary inflation hedge (in terms of credit growth) rather than the disaster hedge that you are suggesting.
What are your thoughts on this?
Also, as Ray Dalio has written, correlation also depends on the economic and business cycles as well. In a deleveraging like the current scenario, correlations would be different than in normal times.
GOLD IS HIGHLY CORRELATED TO COMMODITIES AND COMMODITIES ARE HIGHLY CORRELATED TO EQUITIES SINCE 2002. THIS IS THE TIME WHEN WHEN THE FED FORCED SHORT-TERM RATES BELOW INFLATION.