Correlations & The Long Game

Let's talk about gold. I've owned gold through the SPDR Gold Trust (GLD) for clients and personally since the 2nd or 3rd day that the fund started trading back in 2004. I've been saying the same things about exposure to gold since then which is 1) gold has the historical tendency to not look like the stock market, in times of equity market turmoil it tends to go up, not always, it's a tendency, enough of a tendency that I stick with it. And 2) if gold is the best performer you have, chances are things aren't going so well in the world.

Gold is not the best performer but the chart from Yahoo shows it up for the year just under 10%. 

I regularly see content and Tweets mocking gold because it has done so badly for the last however many years although for the last five years, Yahoo shows it up 56%. That's far behind the S&P 500 but it's not like it's down either. And if you look at a chart of any longish timeframe, you'll see exactly what I said. It tends to not look like the stock market more often than not. If the S&P 500 goes up 50 or 75% for the rest of the decade, I would expect gold to lag that by a lot but during the (hopefully) short windows of market panic I think gold will do what it usually does, that it tends to go up when markets go down. Not always but IMO more often than not. Diversifying with a little gold helps smooth out the ride during market events like this. 

Inflation is perking up of course. As a matter of maintaining a diversified portfolio, do you maintain any exposure to sectors or industries that tend to do well in an inflationary environment? If so, they are probably also up year to date. Holding on to a defense contracting company for the long term makes sense along the lines of gold for some types of crises like the current one also tends to be a good idea. Defense contractors tend to be procyclical so they should lag far less frequently than gold does.

The types of  hedges, liquid alternatives, that I write about so often which do lag when equities are doing well have also generally done what they're supposed to during this event, go up some or go down less. 

At some point the Ukraine situation will end, stocks will have stopped going down and start going back up. I have no idea when that will happen but it will and when that time comes all of these hedges and alts and inverse funds and the rest will probably go back to underperforming and that's ok. Over the long term, equities are the best performing asset class. Alts and hedges are meant to compliment an equity portfolio to smooth out the ride. For the long term, you don't want a portfolio of alternatives, hedged with a little bit of equity exposure unless you're in game over mode. 

If you don't want to be in the business of guessing when the next crisis will come, I certainly don't, then you might want to consider simply maintaining a position for the long term....for a little context I've held GLD for more than 17 years! I think that reasonably meets the definition of long game.