Brexit Proves Once Again That You Should Own Some Gold
Gold is one of the best ways to insure your portfolio. It always has been and probably always will be.
That's why everyone should own some gold. Not just because gold prices may climb (and we show you why this is likely in a special report you can download for free here), but because gold protects you from market volatility.
The following table shows gold's correlation with global stock markets. As you can see, the correlation between gold and stock markets is very low.
The S&P 500, the MSCI World and the MSCI Asia ex-Japan indices all have correlations with each other that are close to 1. This means that they all often move higher or lower together. So, the next Brexit, or some similar event, will affect them all in a similar way.
But the S&P 500 and the price of gold have a correlation of just 0.06. As a correlation gets closer to zero, it means the two assets move more independently of each other. So owning an S&P 500 exchange-traded fund, for example, and some gold would mean at least two assets in your portfolio will react differently to market-moving events.
And normally during an economic crisis, stock markets and gold move in opposite directions. This means gold protects your portfolio from even bigger investment losses -- it's like portfolio insurance.
Look at the Sept. 11, 2001 attacks as an example. Once the New York Stock Exchange reopened a week after the World Trade Center collapsed, the Dow Jones Industrial Average and the S&P 500 suffered some of their biggest losses in history. In the week after the NYSE reopened, the Dow Jones lost 14% and the S&P 500 lost 12%. By the end of the month, they had made some of that back, but it was still a tough time to be a shareholder.
But gold was up 7% by the end of September 2001.
During the global economic crisis, gold also showed its mettle. The global financial system was on the edge of collapse, and governments had to step in to prevent an economic depression and keep the global economy afloat.
Stock markets around the world crashed. In 2008, the S&P 500 lost 38%, the MSCI World Index was down 42% and the MSCI Asia ex-Japan index dropped 54%. This made 2008 one of the worst years for stock markets of all time.
And gold? It was up 6% in 2008. It was one of the best things to own during the financial crisis.
In January of this year, worries over China's economy and the renminbi caused many markets to drop 20% from their highs -- bear market territory. During the month, Hong Kong's Hang Seng index went down 11%, the MSCI World Index fell 6% and the S&P 500 lost 5%.
But gold showed once again why it's one of the best ways to protect your portfolio against market volatility. Gold prices climbed 5% this January. And this proved to be the start of gold's best quarterly performance in 30 years.
Then after the somewhat surprising Brexit vote on June 24, stock markets reacted to the news by panicking. In just one day, the MSCI World Index fell almost 5%, and the MSCI Asia ex-Japan and S&P 500 indices both dropped more than 3%.
But that same day, gold soared 4.7%.
Of course, gold prices can be volatile, and they do go down as well. From a recent peak in August 2011 to recent lows in December 2015, gold prices dropped 44%. At the same time, many stock markets were climbing -- the MSCI World Index gained 46%, for example.
But this is to be expected. When stock markets fall, gold prices tend to climb, but when stock markets climb, gold prices usually fall. A well-diversified portfolio should include both gold and stocks. Gold consistently does well when there is market turmoil and helps keep stock market losses to a minimum.
An easy way to own gold is via an exchange-traded fund. The SPDR Gold Shares ETF (GLD) - Get Report is the world's largest and is backed by physical gold bullion. It trades on the New York Stock Exchange.
We show you other ways to own gold through your brokerage account in our latest special report. You can download a free copy by clicking here.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.