Gold's Strange Behavior Shows It's No Haven

When I went to business school at the University of San Francisco, our class was instructed to build a portfolio that we believed consisted of 10 stocks that had the best ratio of reward to risk, or in other words, the highest Sharpe ratio. I chose gold mining company Placer Dome as one of my stocks. At the time, Placer Dome (which has since been acquired) had a slight negative correlation to the rest of the market, which means that by adding it, I was reducing the overall risk in the portfolio. My professor was impressed, but he wouldn’t be now.

If you’ve been paying attention to prices of gold and gold mining stocks the last few weeks, you probably noticed that they go up when the stock market goes up, and they go down when the stock market goes down, limiting the usefulness of gold as a hedge. This isn’t the first time this has happened. Gold fell hard during the early days of the pandemic in March 2020 on the theory that investors would sell their winning trades, which included gold, to pay for their losing trades. For whatever reason, the risk-reducing properties of gold have pretty much disappeared.

Last year, I wrote that investors should think about an asset’s contribution to portfolio risk, rather than the risk of an asset in isolation. And that had been the main reason to hold gold, regardless of whether you think it’s price will go up or down. But lately, gold is adding to portfolio volatility, and it just goes down all the time no matter what else is happening in markets. In the interests of full disclosure, I have been holding gold continuously since 2005, on the idea that against the backdrop of very loose monetary policy and a leftward drift in the political environment, that precious metal would outperform stocks on a long-term basis. It’s turned out to be about a push.

At the risk of stating the obvious, inflation rates are very high and the performance of gold has been terrible. There are a number of theories for this, and none of them good. Lots of smart and very rational people believe that the price of gold is manipulated. For a while, it seemed like the price of gold would drop about $10 to $15 an ounce every day at 8:30 a.m. New York time. What other explanation could there be for these unusual moves and gold’s underperformance?