July 21, 2009, 5:00 am

6 Investing Rules Revisited Part 4: Gold Goes Up When Stock Markets Go Down

by: The Financial Blogger    Category: Financial Cliché,Investment, Market and Risk
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golden-flowerBefore I was born, gold was used as the reference value for our monetary system. Each country had their dollar linked to gold and depending on the fluctuation; they had to purchase more gold to maintain their economy. Since history is written, gold always played an important role in the economy. It was once used as a payment method but we now prefer credit cards… they are lighter ;-)

This would probably explain our unconditional faith in gold. When the world is about to fall apart, we all agree that gold will remain a sure value. When we are not able to give a value to a piece of paper written $20, we will still recognize the value of a golden piece.

This is how several investors though of selling their stocks and transfer most of their investments into gold. They though it would be a good idea because:

#1Gold always has an intrinsic value (so do good company by the way)

#2If several people do the same thing, chances are that the price of gold will go up and they will have made a good investment being one of the first player to play their card.

Unfortunately for them, the price of gold hit the very same brick wall than stocks, bonds and real estate. Therefore, gold has proven its limit as a “sure value” during market crashes.

There is a strong mechanism regulating the price of gold: the consumer. When the price of gold goes up, it is followed by the price for golden jewelleries. Then, the demand for jewelleries decreases and the price of gold is back under pressure.

An additional factor to consider is the recent investment from mining companies in the discovery for golden mines. This should increase the offer of gold on the market and stabilize the price.

So while we think that people may leave the US dollar to buy gold, the price of this precious metal might not jump. The above mentioned mechanisms will slow down the price progression and help create equilibrium.


Gold Goes Up When Stock Markets Go Down: Revisited

It is still true that gold will show a smaller volatility and may protect a part of your investments from the market turmoil. However, this should not be used as the ultimate solution to protect your portfolio against markets drops. Those who think that investing in gold will bring back their losses from the stock market might be deceived.

However, holding 10% gold in your portfolio will improve your diversification and reduces your risk.

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Comments

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great article kind of explains the current high price of gold.

gold is to contra the losses in the stock—it will drop asap the 3rd adjustment quarter picture is shown

[...] Financial Blogger presents 6 Investing Rules Revisited Part 4: Gold Goes Up When Stock Markets Go Down posted at The Financial Blogger , saying, “When the world is about to fall apart, we all [...]