You Can Always Go to Gold

Consider adding gold to your portfolio. First, in a turbulent market like this one, you want to diversify away from financial assets. And while diversification can be elusive in market crashes, if you have been in cash and gold this year, you wouldn't have lost any money at all -- gold is up 4% year to date and T-bills have returned approximately 1% year to date.

The theory of diversification is that you always want some of your assets moving in the opposite direction of your other assets. Over the last 100 years, gold has been lowly or negatively correlated to the dollar, stocks, and bonds. As such, it's pretty likely to do well, when stocks and bonds do poorly. And besides treasury bonds -- the last asset class still in a bubble -- bonds have clearly entered their own bear market.

Now, let's examine the gold market. You can see in the following graph how gold has outperformed once stocks stopped performing in 2000.

Gold vs. the Dow Jones (1980-2008)

Click here for larger image.

The gold bear market began in 1980 after the Hunt brothers failed in their attempt to corner the silver market. Gold reached $850 an ounce briefly while silver touched $50 an ounce. In 1983, gold fell solidly below $500 and investors began to abandon it as an asset class.

The bear didn't release its grip on precious metals until late 2001. Bear markets end when the asset in question is thoroughly despised. Like the "death of equities" proclamation by Business Week on its August 1979 cover, gold suffered a similar eulogy in 1999-2001, while the great bull market in stocks took its last gasps of air.

Just as equities were left for permanent burial in 1979, gold was thoroughly discredited by 1999. Two entire generations of investors had made more money investing in stocks and bonds from 1982-1999 than had ever been made before. (An investing generation is often thought as five years to10 years, since investing eras seem to change due to cyclical cycles about every five years.)