Back in October of last year when the country seemed like a collection of individuals walking around looking like a deer in headlights, money managers were searching for any asset class that would hold value. Short term treasuries, widely considered the safest investment on the planet, shot up in value while the prices of almost every other asset on the planet eroded.  I say almost there because gold, the oft criticized yellow metal, is one of the few that did not. Despite gold's decline today, investors would be wise to look at the metal as a hedge against a market decline, in addition to a hedge against inflation.

Between September 26th and November 20th of 2008 the S&P lost just over 37% of its value as a perfect storm of bank failures, job losses, and frozen credit markets sent all markets globally into a tailspin. At the time managers were talking about decreasing risk exposure with many looking to shift from high Beta names to low beta names. While this strategy did not reward them in an absolute sense, most of those sectors with the lowest betas (Consumer staples, Utilities) outperformed the market and higher beta sectors as you would expect.

But, as credit spreads widened, companies with leverage on their balance sheet suddenly carried a higher risk of financial distress. This put pressure on the equity prices of traditionally defensive sectors mitigating the positive effect of their low betas. In other words even those returns thought to be least risky and therefore less volatile were all of a sudden under pressure.  Utilities, widely considered one of the most defensive sectors, saw share prices drop 25% (as measured by the I-Shares Dow Jones US Utilities ETF IDU) despite a beta of less than .6. The low volatility inherent in utilities was not enough to offset the concerns about the sector's highly leveraged capital structures in an environment where private borrowing costs were skyrocketing and access to credit disappeared. Hence, the underperformance of the sector.

What most people did not expect was the marked outperformance of gold in this period. Gold not only outperformed its Beta predicted return during this period, it was actually positive while every sector of the economy saw at least double digit percentage losses.  The Beta for gold is less than .45, lower than that of even the most defensive sector in the economy. Even so, based on the decline in the S&P 500, gold should have lost value. It did not. So while traditionally defensive sectors were underperforming their betas during the fall due to credit concerns, gold was outperforming its beta based on its century's old status as a safe haven.

While gold the metal proved to be a refuge from the equity market's weakness, gold stocks proved an even worse store of value, losing 50% of their value during the time( as measured by GDX). Even with an average beta of less than 1, gold stocks have proved to be extremely susceptible to general equity market weakness. As such, any expected correction in the market should be accompanied by a marked decline in gold equities.

With investor appetite for risk declining once again (see today's 3.28 bid to cover ratio on today's treasury auction for further evidence) based on a looming correction in equities, it becomes increasingly important that value is actually protected when the risk of a portfolio is ratcheted down. With this in mind, it is clear that while gold's case in an inflationary environment is air-tight, its defensive properties contribute just as much to its shine.

As a senior market strategist with Delta Global Advisors, Paul Baiocchi Paul has traveled extensively and met with dozens of companies in Hong Kong, Calgary, Shanghai, Sydney, Tel Aviv, Sydney, Dubai and many other global business centers.  He previously served as a branch manager with Euro Pacific Capital and holds both a B.S. in Financial Services from California State University at Chico and an MBA in International Business from the University of British Columbia's Sauder School of Business.