“Correlation”
is a measure of how closely two assets track each other. A reading of
1.0 means they trade in lock-step, while zero means they are independent
and a reading of minus-1.0 means they act like opposites.
There are conflicting evidences about correlation of price movements of Gold and Stocks; Also between Gold & Bonds .So the correlation turns out to be contextual in meaning.
A study conducted by FactSet Research Systems to analyze the metal’s short-term correlation with two other investments: the 10-year Treasury note,
representing safe havens, and the Standard & Poor’s 500 stock index(US:SPX) , representing risk has interesting revelations.
The correlation between gold and the 10-year
Treasury has jumped above 0.6 at some points over the past five years
and has fallen below minus-0.8 during others, changing direction several
times. The one between gold and stocks has had similar spasms, with the
highs topping 0.9.
Jeremy Siegel, Professor of finance at the Wharton School of the
University of Pennsylvania, writes that stocks have outperformed gold
over the past two centuries. Siegel claims that while stocks appear to be most volatile in the short term, gold is most volatile over the long term
This leads us to believe that 100% allocation to Gold is dangerous. Here the old adage come handy 'do not put all your eggs in the same basket'.
Gold represents about 1.55% of the global portfolio. Now filter geographic/cultural dimensions and a feel of your own. Take a view on how gold behaves in your opinion in relation to other assets. Put a number between 1-100 on to that thought. How much did you get ? Look at plus or minus 10% and fix it..Yes you got your number.
While gold prices undergo fluctuations, one has to make some returns or even create a downside protection at times.Now look how much gold great investors are keeping.
Happy investing
Those who read this also read
1. Did gold get enough
2. Uncertainties galore
3. A Pinge of gold in your portfolio
4. Gold as an Investment
Start Early, Proceed Systematically, Look Long Term
Let Your Money Work For You
All You Wanted to know about money
