When I went to business school at the University of San Francisco, our class was instructed to build a portfolio that we believed consisted of 10 stocks that had the best ratio of reward to risk, or in other words, the highest Sharpe ratio. I chose gold mining company Placer Dome as one of my stocks. At the time, Placer Dome (which has since been acquired) had a slight negative correlation to the rest of the market, which means that by adding it, I was reducing the overall risk in the portfolio. My professor was impressed, but he wouldn’t be now.
If you’ve been paying attention to prices of gold and gold mining stocks the last few weeks, you probably noticed that they go up when the stock market goes up, and they go down when the stock market goes down, limiting the usefulness of gold as a hedge. This isn’t the first time this has happened. Gold fell hard during the early days of the pandemic in March 2020 on the theory that investors would sell their winning trades, which included gold, to pay for their losing trades. For whatever reason, the risk-reducing properties of gold have pretty much disappeared.