One reason why investment advisors will recommend buying gold is due to the diversification benefits it offers.
In other words, gold tends to have low correlation with other asset classes and therefore reduces portfolio volatility.
However, those correlations have been volatile as of late.
Cullen Roche of Pragmatic Capitalism points to a new report from the World Gold Council that compares gold’s recent correlations to several asset classes. They also compare those correlations relative to long-term correlations as measured by data since 1987. From the WGC:
Correlation statistics between gold and other assets were similar to those experienced in Q2 2012 (see Chart 2). Its correlation to developed and emerging market equities was slightly higher than normal, but its correlation to global bonds and commodities was lower than in Q2. However, these deviations from long-term averages were not large enough to imply atypical behaviour. In prior quarterly commentaries we have shown how gold’s correlation to equities hovers around zero over the long run, but can fluctuate over shorter periods of time.
In particular, both gold and equity prices moved higher during Q3, leading to an elevated correlation. However, prices were driven higher by different underlying reactions. While both responded to monetary policy announcements and measures undertaken by central banks around the world, equities responded to central banks’ pledges to stimulate economic growth; gold, on the other hand, moved higher encouraged by factors that we discuss in the section titled “unconventional monetary policy and gold”.