What do you do when nearly all asset classes are overvalued?
Diversification is one of the oldest principles by which people try to hang on to their wealth, however little they might have. Don’t put all your eggs in one basket, it goes. Diversification is not designed to maximize profits or minimize costs. It’s designed to get you through a smaller or larger fiasco, not necessarily unscathed but with at least some of your eggs intact so that you can go to market another day. This search for stability is a critical concept when looking at gold as diversification of risk in other asset classes.
There are many reasons to own or trade gold that are beyond the scope of my thoughts here on diversification. So I’ll leave them for another day.
The classic and most basic diversification for American households has been the triad of stocks, bonds, and real estate. In the past, it was often held that when stocks go up, bonds decline. This has to do in part with the Fed, which tends to raise rates when things get hot, thus driving up bond yields (which means by definition that bond prices decline). So stocks and bonds balanced each other out to some extent.
Throw in some leveraged real estate – the house you live in – and in the past, your assets were considered sufficiently diversified.
But this no longer applies today: Stocks, bonds, and real estate – both residential and commercial – all boomed together since the onset of QE in 2009. Other asset classes boomed to, including art and classic cars. Almost everything went up together in near lockstep. For a while, gold and silver, which had been on a surge since 2001 continued to surge. In other words, it was very difficult to achieve actual diversification.
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