Is gold better for diversification than bonds?
''Gold Will Save Us All
Allow me to start off this article by making it very clear that I am by no means a “Gold bug.” Everything I do in markets relates to interpreting market movement through the lens of intermarket analysis, and taking a deep dive into asset classes and investment themes as I do in the 20+ page weekly Lead-Lag Report.
By far and away, the most disturbing trend out there is in bonds. It appears inflation expectations are not rising regardless of the amount of on-going money printing. This is unequivocally not just a US phenomenon. We are in a global situation where major economies, like Germany, are seeing a complete destruction of return on anything fixed income.
Bonds have historically been the best hedge against market declines and volatility, with government debt being the truest diversifier in the sense that in risk-off periods, there is a “flight to safety” that pushes bond prices up and yields down. But we have a problem here should this momentum in bonds continue and yields globally in respective countries push to zero, or even potentially go even more negative in some instances. This especially in light of where we are in the expansion cycle. The S&P 500 appears to only now be getting the message of reflation hope being misguided.
That problem? If the cost of capital has no cost, capitalism as we know it breaks.
What does any of this have to do with Gold? Numerous studies have shown that Gold is neither an inflation hedge, nor a deflation hedge over time. Gold is however a diversifier in the sense that in periods of heightened market stress, the performance of Gold tends to counteract stock market volatility by catching its own flight to safety bid.
Gold then may end up actually being a better diversifier than bonds should these yields get even more extreme on the downside. Why? Because if yields go towards negative and even more negative, then the yellow metal, with a yield of 0%, ends up having more yield than bonds, and ultimately provides more of a hedge in the event that the bond market is indeed anticipating a major deflationary wave and global economic recession to come.
Will Gold save us all from bonds pricing in Armageddon?''