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Wednesday, December 23, 2009

Gold: A Portfolio Diversifier ?

A portfolio addition that adds to diversification and thus reduces a risk in a portfolio i.e. it should have low or negative correlation with othe holdings,.. Listening to those gold ads one certainly gets the impression that is the relationship between gold and stocks and would be the results of  adding gold to a portfolio.

Remember if 2 holdings move in tandem even if one outperforms the other they can still be highly correlatted. For instance emerging markets have strongly out performed the US market but in the same direction hence
 their correlation for one year is ,88(88%), I didn't have access to the data for gold but just eyeballing the charts for een vs sp 500 ( top chart) it is surely very similar to the gold sp500 one year (middle) and 2 year (charts) i,e, high correlation.

gold's (GLD)return ytd is  22.7%
S+P 500 (SPY) 25.97%
 emerging markets index (VWO) 71.23%
DBB (base metals ) +82.79%
mention that to Glenn et al when you call in