Rethinking Gold: What if It Isn't a Commodity After All?

08/23/2010 Share 0 comments

Jeff Opdyke at Wall Street Journal wrote the following article in the journal's weekend edition. In the article, the author stated that instead of thinking of gold as a commodity, it is more appropriate to view gold as a shadow currency. Here is what the author had to say: 

"This won't sit well with some people: Gold isn't a commodity. There. I've said it.

But before you fire off an angry response, hear me out. The facts might change your view of gold's role in a portfolio.

...

Instead, "gold is a currency" whose daily price is a gauge of the market's concern about the "potential diminishment" of the purchasing power of the dollar and other paper currencies, says Paul Brodsky, a principal at New York's QB Asset Management.

If he is correct, it is the potential longer-term weakening of the dollar that is the real issue for the gold market, not inflation or deflation."

A couple of key statistics to back up his claims:

1). "I recently asked research firm Ibbotson Associates to run a correlation study to determine how closely inflation and gold-price movements track each other. You would expect gold, as a purported commodity, and inflation to move in tandem.

The data, going back to 1978 and capturing an inflationary spike, shows a correlation of, at most, 0.08."

2). "Going back to 1973—a period that defines the modern, non-gold-backed dollar—the greenback's movements closely track gold's direction. The correlation between month-end gold prices and the Major Currencies Dollar Index, as reported by the Federal Reserve, is minus-0.45.

That clearly is a stronger correlation than you find with inflation. But let's take this a bit further. Let's shorten the time frame to the period from gold's 1980 peak to today.

The result: Over the past 30 years, the correlation between the dollar and gold is minus-0.65—a high negative correlation. It means the dollar and gold are effectively on opposite ends of a seesaw. When the dollar is in favor, gold retreats. When it is under pressure, gold prices swell."

We at MyPlanIQ view Gold could be an asset class on its own. Though we classify Gold as part of commodities asset class, our system will pick up Gold and/or other broad base commodity index if the markets think so. Thus, for a plan with Gold such as GLD as its candidate fund, our tactical asset allocation will have exposure to gold when it sees fit, while still controlling the risk and diversification. We will not go gang buster to put our portfolio entirely in gold but a healthy exposure is good dose of anti dollar weakness and anti inflation. 

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