The high-flying Nasdaq Composite Index, heavy with technology stocks, had an exceptional 2020, soaring 43.6 percent, its best annual performance in 11 years. The momentum continued early into 2021. But in mid-February, the Index was showing signs of cracking, tumbling seven of eight days as investors became fearful that tech shares may have climbed far ahead of what their near-term earnings potential would justify.
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For nervous Nasdaq investors, gold can be a smart holding that can stabilize their portfolios. This is because gold has a negative correlation to stocks, particularly when the Nasdaq Composite is suffering significant declines.
Over the past five years, gold has risen 80 percent of the time when the Nasdaq Composite suffers a substantial decline, according to an analysis by the World Gold Council. The Council used a popular measure of risk in the investment world: standard deviation, which measures a movement away from an expected return. Well balanced portfolios tend to move within two standard deviations of their anticipated returns 95 percent of the time. Whenever the Nasdaq Composite Index dropped more than two standard deviations, it was highly likely—four of five times—that gold would rise, helping to offset stock losses.
This is why gold is a refuge for investors when technology stocks tumble.
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