Gold's unusual behavior demonstrates that it isn't a safe refuge for personal finances.

when I was in business school at the University of San Francisco, we were told to put together a portfolio of ten companies with the best reward-to-risk ratio, or Sharpe ratio. One of my investment picks was the gold mining business Placer Dome. Placer Dome (which has since been bought) had a little negative correlation with the rest of the market at the time, which meant that by adding it to the portfolio, I was lowering total risk. My professor used to be amazed, but not anymore.

If you've been following gold and gold mining stock prices over the last few weeks, you've probably observed that they rise when the stock market rises and fall when the stock market falls, reducing gold's use as a hedge. It isn't the first time something like this has occurred. On the idea that investors would sell their winning contracts, which included gold, to compensate for their losing transactions, gold plunged sharply in the early days of the pandemic in March 2020. Gold's risk-reducing characteristics have almost vanished for whatever cause.

I argued last year that investors should consider an asset's volatility.

Rather than focusing on the risk of a single asset, consider how it contributes to overall portfolio risk. And it had been the primary incentive to invest in gold, regardless of whether you believe its price would rise or fall. However, gold has recently added to portfolio volatility, and it just goes down all the time, regardless of what else is happening in the markets. To be completely transparent, I've been accumulating gold since 2005, with the expectation that, given the backdrop of extremely loose monetary policy and a leftward shift in the political environment, the precious metal would outperform stocks over time. It turned out to be a matter of pushing.

At the sorry for repeating the obvious, but inflation rates are quite high, and the economy is in a state of transition. Gold's performance has been dreadful. There are several hypotheses for this, but none of them are good. Many intelligent and logical people feel that gold's price is influenced. For a while, it appeared like the price of gold would decrease by $10 to $15 per ounce every day at 8:30 a.m. in New York. What else may account for these strange movements and gold's poor performance?

I've got a few in my possession. The most obvious reason is that shorting gold has proven to be so profitable for so long that individuals continue to do it instinctively. Copycats flock to profitable transactions. The futures market for gold is extremely liquid, allowing for the selling of many years' worth of mine production in a single transaction. I believe that many large macro hedge funds, as well as many artisanal asset managers, habitually short gold. But I don't know anyone selling gold, which reminds me of the famous Pauline Kael remark about not knowing anyone who voted for Richard Nixon. It all comes down to the people you choose to be around.

Many other people don't realize that gold is a "faith" trade, similar to Bitcoin. There is a segment of the market that will never sell gold, no matter how low its price falls, which helps to explain why, even if gold hasn't done well during periods of high inflation, it hasn't fallen nearly as much. And, as pessimistic as gold bulls are about the market, the decline in gold has been less than that in equities.