The right kind of diversification

There is a degree of scepticism surrounding the benefits of diversification in all market conditions. Correlations tend to increase in line with market uncertainty (and volatility), driven in part by risk-on/risk-off investment decisions. And many so-called diversifiers fail to deliver when investors need them the most.

Due to its dual nature as a consumer good and investment, long-term gold price trends are supported by income growth, but in the short- and medium-term, however, the gold price tends to rise during periods of uncertainty. 

As a byproduct, gold’s correlation to most assets is low in both expansionary and recessionary periods. Gold’s correlation to stocks and other risk assets is more negative when the stock market experiences stronger pullbacks. Yet, gold prices often increase during sharp stock market bull runs, as driven by the positive income effect.

*Based on weekly returns of the S&P 500, MSCI ACWI ex US, JPMorgan US Treasury index, BarCap Corporate Bond Index, S&P GS Commodity index and LBMA Gold Price using data from January 1987 to February 2017. Business cycles as defined by the National Bureau of Economic Research (NBER).
Source: Bloomberg, NBER, ICE Benchmark Administration, World Gold Council

*Based on weekly returns of the S&P 500, LBMA Gold Price and the S&P Goldman Sachs Commodity index using data between January 1975 and March 2017. 
Source: Bloomberg, ICE Benchmark Administration, World Gold Council