Cash is often the first thing investors think of when they’re worried about declines in “risk” assets like stocks. Treasuries are another, although with prices so high and yields so low, they present risks of their own. Moreover when inflation – dollar depreciation – is a key concern neither of these provides much protection.
Gold is another popular hedge against systemic risk. It has recently done well as headlines have not. But it may not be so widely appreciated that one of the key reasons for its reputation and its usefulness is because of its low correlation with stocks. Other hard commodities, such as silver, platinum and copper, especially taken in combination, are equally effective defenses against dollar depreciation. They are simply more highly correlated with stocks than gold, making them less useful in a portfolio that contains a high allocation to stocks. For a portfolio that has a low allocation to stocks, or one in which stocks are fully balanced with treasuries, the addition of other hard commodities like these can complement a gold allocation to hedge against simultaneous geopolitical and inflationary risks. We’ve seen this notion in action over the past week.