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, gold’s long-term price trend is supported by income growth, but in the short- and medium-term its price tends to rise during periods of uncertainty. 

Gold's correlation to major financial assets during US expansions and contractions*

 

*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

Correlation of US stocks versus gold and commodities*

 

*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