Gold is one of those investments that has been labeled the "Safe Haven" investment or the "Inflation Hedge" product and this is because of its historical correlation to the broad markets. This simple means that gold tends to move opposite the market. If one were to believe that the markets were ready to experience a rough patch, they could consider adding some gold to their portfolio.

Historically gold moves in the opposite direction to the market's to some degree. With this in mind you could think of gold as a bit of a hedge. Here is the problem. Looking back over this markets impressive rally we can see how correlated gold was during that time period. So, looking back over 10 years the price of gold actually shows a very small, but positive correlation to the S&P 500. The long term investor may have thought they were hedged but would be wrong.

When we start to zoom into recent market movement, we notice that there is a shift happening in gold's performance. Looking over a 3 year time period gold shows that negative correlation we are looking for. A slight negative correlation just as we would expect. If we look just over 1 year there is a clear, negative correlation between gold and the S&P 500. Gold, at this point is negatively correlated to the S&P 500 by almost -50%..

What does this really mean? Well, imagine you own 1 S&P 500. If you bought 1 Gold you would be hedged in the very short term by 50%. A small drop in the S&P 500 would be hedged by half due to the increase in your gold position.

The takeaway is that if you are planning to use gold as a hedge, you want your hedge to be needed in the short term, as the long term protection of gold just hasn't been there.