Any wise person would tell you, “don’t put all your eggs in one basket”, but for investors this translates as “diversify your portfolio”. Markets have a way of catching people unguarded and during hard times a narrow portfolio is more likely than not to take a hit. Stocks and commodities are assets that are subject to large fluctuations depending on the market scenario. Fixed Income assets such as government bonds and securities have historically been considered safer portfolio options but provide investors lower returns. Moreover, with the current Euro Zone crisis and the downgrade of US debts, fixed income securities are anything but secure in today’s context. 

Although commodities are considered volatile, investors are increasingly finding out that they provide much needed stability and risk hedging options on any portfolio. One of the most popular commodities used to achieve the goal of stability is gold. Gold has always considered being a “safe haven” for investors to turn to during times of trouble. It has long been known that a weaker US dollar encouraged strong gold prices and vice versa. Not only is the price of gold related to the strength of the US dollar but, depending on the situation, is also correlated to the performance of the stock market.

During 2011 the price of gold showed a -0.64 correlation between S&P 500. This means that a 1% loss in S&P 500 would relate to a 0.64% gain in gold prices. This relation reflects the fact that gold has been used to hedge losses incurred in investor’s stock portfolio and higher confidence in gold’s stability. 2012 on the other hand shows a correlation of 0.003 with S&P 500, which means that rather than an alternative investment, gold is unaffected by S&P 500 movements and offers  diversification opportunities.

 With the economy being unpredictable, gold offers protection to investors from volatility in the stock market and from past experience, suggests higher returns than fixed income securities if stocks are headed for a major plunge. But this is just my insight and yours may differ from mine!