Gold hedges against stock market -- Include in portfolio

January 3, 2008

A recent research report from Trinity College answers the age-old question: Is buying gold a good hedge against declines in the stock market? In brief, the answer is yes because gold prices increase dramatically after a stock market crash....for about 15 days. After that, gold prices tend to lose relative value against stocks, which often rise again shortly after a crash.

What buying gold as a hedge means:

This research showed that gold prices increased from 1999 through 2006, while the stock market declined from 2000 to 2003. Gold prices spiked when the stock market crashed, as scared investors panicked, sold their stocks and bought gold. However, when panic was over, the money moved back into stocks, and gold was no longer a better investment.

Action steps:
What this research implies is that smart investors should include gold in their portfolio as a hedge against a potential stock market drop. If the stock market crashes, they should wait for gold prices to jump up, and then sell the gold, using the proceeds to buy stocks after the 15 days.

Now, of course, your financial planner will scream and tell you to do no such thing, that you can't time the market. Whether you decide to listen to financial advisor or not is up to you. Whatever you do, don’t follow the crowd and sell your stocks as they crash, buy gold immediately at inflated prices and then wait vainly for gold to reach $800 an ounce again.

Source: Trinity College, Dublin, “Is Gold a Hedge Or a Safe Haven? An Analysis of Stocks, Bonds and Gold,” December 2006; The Economist, “A find and fickle friend,” April 8, 2007.

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