Written by : Jared Dillian
By now, most of my readers are acquainted with my Awesome Portfolio—but if you’re not, you should keep 20% of your portfolio in gold, which I like to call the “anti-investment.”
Why? You don’t really buy gold because you think it’s going to go up. You buy gold because it’s going to save your neck when stocks and bonds go down.
That said, I think tariffs are bullish for gold right now. Spot gold broke out through 2,809, which was the old high, and is sitting at new highs as I write. It’s pretty much a straight shot to 3,000 at this point. I look at this as an easy trade, one that is really not going to test you.
Correlation
As for my Awesome Portfolio, everything is there for a reason, including gold, and a lot of it comes back to correlation.
Correlation is a measure of how much or how little two things—in this case, two kinds of assets—move together. The scale runs from -1 to +1.
When two types of investments move in the same direction at the same time, in perfect lockstep, they have a correlation coefficient of +1. And we say that they are positively correlated.
When they move in the exact opposite direction, they have a correlation coefficient of -1. And we say they are negatively correlated.
Gold and stocks, for example, are negatively correlated. Not perfectly so, but if you look at the gold price over the last 50 years and how it moved compared to the S&P 500, you can see that they often moved in different directions.
Note that gold and stocks frequently go up together… but not down together. And when they do go down at the same time, it typically isn’t by much.
Also, the terrible years for stocks have typically been great years for gold, and vice versa. In the last 51 years, there were eight years when stocks dropped more than 10%. During those years, gold rose an average of 23.7%.
During the same period, there were eight years when gold dropped more than 10%. And during those years, stocks rose an average of 14.1%.
This is why correlation matters. If one part of your portfolio goes down, you want something else in there to make up for the losses.
Gold Has Held Its Purchasing Power
Gold has a long history of doing exactly what it’s supposed to do: hold its value. Really, it’s done this job for millennia.
What does that mean? If you look at what you could have bought with an ounce of gold during the heyday of classical Greece, or Rome, or medieval Europe, or modern-day America… well, you could have bought the same amount of stuff (more or less).
I have to say, I think it’s a little weird that people invest in shiny rocks. But this has been going on for four or five thousand years. Some people say technology will change that. Yet it keeps happening.
Over the last 70 years, for example, gold’s inflation-adjusted annual return is 2.3%. In other words, gold has held its purchasing power, just like it’s supposed to.
End of the day, the biggest reason to own gold is that it smooths out the volatility in your investment portfolio.
Add a little bit of gold—I recommend 20%—and you’ll pretty much get the same overall returns. But you’ll cut your volatility in half.
Jared Dillian
Jared Dillian writes The Jared Dillian Letter, a free investment newsletter at JaredDillianMoney.com. Subscribe here to receive a new issue in your inbox every Thursday.
