Gold Loses Its Value as Selloff Protection

There's been a lot of ink spilled in the last few years (and I have contributed some of that ink) about how investors can use commodities to diversify their stock portfolios because there's a low correlation between the two asset classes.

The easiest and most obvious commodity to capture this effect is gold, but lately I have been starting to wonder if gold has a tighter correlation to stocks than it used to because it has become so popular. Author Nassim Teleb had a great comment on the Wealth Track program a few weeks ago when he said that diversification used to work when no one knew about diversification.

A lot of people know about gold -- maybe too many people -- and that may be why it has not offered much protection during the last three biggish stock market dips. During the selloff that started in May of 2006, the S&P 500 dropped roughly 5% in a month. Gold, as measured by the StreetTRACKs Gold Trust (GLD Quote), fell 17% over the same period.

Again in the first quarter of this year, when the S&P 500 fell 5%, GLD dropped 7.5%.

	Where does gold fit into your portfolio? Answer Here

Gold is holding up better than stocks in the current market panic, having lost only 4% since July 19, compared with not quite 10%, on a closing basis, for the S&P 500. But that's still not as low of a correlation as investors might expect.