Gold Is Good, But There Are Even Better Ways to Hedge

• October was weird: stocks, bonds and gold suffered losses
• An unhedged portfolio is an accident waiting to happen. Get uncorrelated!
• So let’s talk about how effective gold is as a hedge, and what else works

Mebane Faber recently tweeted this:

His tweet made me stop and think: how often have stocks, treasuries and gold moved in lockstep?

It’s a truism that the key to a well-diversified, low-risk investment strategy is to own several assets that are not correlated to each other. Investing simultaneously in both equities and bonds is generally a good idea, as one tends to go up when the other is sinking. Which is why a 60/40 asset allocation (60% stocks and 40% bonds) is considered to be a matter of basic prudence.

Stocks and bonds are not always counterweights to each other

However… the problem with this rule is, it doesn’t always apply. Not only do both assets occasionally suffer simultaneously for days, for weeks or even for months on end. It’s worse: equities and bonds went down together for over a year in 1931, 1941 and in 1969. And in other years, there were often long stretches of several months where both asset classes suffered.