Stock Market Selloff Showed Gold Can Reduce Portfolio Risk

Stock Market Selloff Showed Gold Can Reduce Portfolio Risk 

– Recent stock market selloff showed gold can deliver returns and reduce portfolio risk
– Gold’s performance during stock market selloff was consistent with historical behaviour
– Gold up nearly 10% in last year but performance during recent selloff was short-lived
– The stronger the market pullback, the stronger gold’s rally
– WGC: ‘a good time for investors to consider including or adding gold as a strategic component to their portfolios.’
– Gold remains one of the best assets outperforming treasuries and corporate bonds

A recent World Gold Council (WGC) study has concluded that the market selloff on February 5th made the case for gold as both a diversifier and an asset that protects portfolios during market downturns.

The stock market selloff of early February saw stocks tumble. But, whilst it was sharp it was also short-lived. Many watching the gold price were disappointed to see gold lose around 0.8% of its USD price between February 5th and February 12th, when both the Dow Jones and European stocks and begun to recover losses.

Yet to judge gold on its price performance alone is to misunderstand gold (or, in fact any asset’s) role in a portfolio. In order to appreciate it’s performance one must compare it to other assets as well as it’s long-term behaviour.

Gold’s protection was stronger than you realise

Whilst gold did drop by nearly 1% in USD terms it was a different story for other currencies (which account for 90% of gold demand). This was particularly the case in Europe where currencies weakened against the dollar, increasing gold prices. In euro terms old rallied by 0.9% and 1.8% in sterling, between Friday February 2nd and Monday February 12th.

The 0.8% overall drop in the gold price over the beginning and end of the stock market selloff was not reflective of gold’s performance during the period:

‘[Gold] still outperformed most assets on the week (other than treasuries) and reduced portfolio losses, providing liquidity to investors as market volatility rose.’

“Gold’s effectiveness as a hedge increases with systemic risks”

Gold and stocks are inversely correlated in market downturns. This is thanks to the behaviour of investors who typically show a ‘flight-to-quality’ behaviour.

This benefit of gold is better seen when market crises are broader or last longer than the stock market correction we saw in February.

Examples include Black Monday, the 2008–2009 financial crisis and the European sovereign debt crisis (Chart 5). But there are exceptions.

Gold has been more effective as a hedge when a market correction has been broader (i.e. affects more than one sector or region) or lasted longer.

During the 2001 dot-com bubble burst, the risk was mainly centred around tech stocks and was not enough to elicit a strong reaction from gold; it was not until the broader US economy fell into recession that the gold price responded more sharply. Similarly, investors outside of Europe discounted the possibility of a spill-over from the 2015 Greek default. In recent pullback, as stocks quickly rebounded, gold’s reaction was more muted.

However, taking a longer, more strategic view, is quite relevant.

Looking beyond the short-term stock market selloff

As we often discussed, mainstream media and market commentary have a strong bias towards short-term views. This leads to a very blinkered approach and often an all-too-easy dismissal of gold as a worthy investment.

There has been talk of a stock-market correction for a long-while. Frothy asset prices, pumped-up valuations and the ongoing uptick in stock market prices appeared to be just asking for a market selloff. We finally saw a selloff last month when the DJIA had it’s biggest drop in history. Was this the end of the bubble? Prices did recover but that doesn’t mean it wasn’t the final bell in what has been a long run.

An environment is now forming where a number of corrections are becoming more likely in the near-future. Interest rates are slowly being hiked up, how markets and economies will cope with this after a record-long period of ultra-low interest rates is something we are just beginning to get a taste of.

Trade wars are looming, inflation levels are climbing and political sabre-rattling is growing stronger. With this in mind the World Gold Council reminds us of gold’s ‘four key roles in a portfolio’:

– delivering positive long-term returns

– improving diversification

– providing liquidity, especially in downturns

– enhancing portfolio performance through higher risk-adjusted returns

So far, 2018 has been a good case in point of gold’s role as a strategic asset. It has been one of the best-performing asset classes year-to-date, besting treasuries and corporate bonds (Chart 6). It has served as a diversifier and liquidity source as stock markets tumbled. Thus, gold helped investors improve their portfolios’ performance.

‘Consider including or adding gold as a strategic component to portfolios.’

The World Gold Council notes that there has been an increase in bullish positioning in gold options. ‘In our view, this type of bullish positioning suggests that investors may be increasing their portfolio protection against further market downturns…this is as good a time as any for investors to consider including or adding gold as a strategic component to their portfolios.’

You can find out more about investing in gold as part of a diversified portfolio in our Comprehensive Guide to Investing in Gold.

 

All quotes and charts taken from the World Gold Council

Recommended Reading

Gold Rises As Global Stocks Plunge and Bitcoin Crashes 70%

Buy Gold, ‘Get Out Of The Stock Market’ Warns Druckenmiller

Invest In Gold Now As Stock Market To Crash – Faber

News and Commentary

Gold slips as dollar holds steady (Reuters.com)

Stocks in Asia Rally After U.S. Jobs; Yen Advances (Bloomberg.com)

S.Africa gold miners’ silicosis lawsuit settlement expected within 6 weeks (Reuters.com)

Worry about rising inflation? Sure, but there’s no reason to be scared (MarketWatch.com)

Gundlach Says Volatility ‘Genie’ May Not Be Back in Its Bottle (Bloomberg.com)


Source: Zerohedge

In Debt and in Demand: Europe’s Most-Leveraged Stocks Surge (Bloomberg.com)

Another Very Interesting COT Report (GoldSeek.com)

ICTA wins another one for coin buyers (NumismaticNews.net)

The Amazing Amount of Gold The U.S. Exported Since 2000 (GoldSeek.com)

$21 Trillion And Rising: How Central Banks Are LBOing The World In One Stunning Chart (ZeroHedge.com)

Gold Prices (LBMA AM)

12 Mar: USD 1,317.25, GBP 950.66 & EUR 1,069.87 per ounce
09 Mar: USD 1,319.35, GBP 955.21 & EUR 1,072.50 per ounce
08 Mar: USD 1,325.40, GBP 955.08 & EUR 1,070.39 per ounce
07 Mar: USD 1,332.50, GBP 960.07 & EUR 1,071.86 per ounce
06 Mar: USD 1,324.95, GBP 957.01 & EUR 1,074.00 per ounce
05 Mar: USD 1,326.30, GBP 958.78 & EUR 1,075.63 per ounce

Silver Prices (LBMA)

12 Mar: USD 16.46, GBP 11.88 & EUR 13.39 per ounce
09 Mar: USD 16.49, GBP 11.92 & EUR 13.40 per ounce
08 Mar: USD 16.48, GBP 11.89 & EUR 13.31 per ounce
07 Mar: USD 16.65, GBP 12.01 & EUR 13.42 per ounce
06 Mar: USD 16.62, GBP 11.96 & EUR 13.41 per ounce
05 Mar: USD 16.51, GBP 11.95 & EUR 13.42 per ounce


Recent Market Updates

– Gold Protects As Cashless Society Threatens Vulnerable
– Women’s Pension Crisis Highlights Dangers To Savers
– London Property Sees Brave Bet By Norway As Foxtons Profits Plunge
– Gold Does Not Fear Interest Rate Hikes
– RaboDirect Closing – Gold May Protect From Irish Banks Going “Belly Up Again” – Finuncane
– Silver bullion will likely outperform gold bullion going forward
– Gold $10,000? Goldnomics Podcast Quotations and Transcript
– Trump Risks Trade and Currency Wars – Protectionism and Economic War Loom
– Four Key Themes To Drive Gold Prices In 2018 – World Gold Council
– Is The Gold Price Going To $10,000? (Goldnomics Podcast 3)
– Gold Corridor From Dubai to China Sought By China
– Digital Gold Provide the Benefits Of Physical Gold?
– Weekly Briefing: Currency Wars – ECB Warns Re Trump, Russia and Turkey Buy Gold and BOE Bitcoin Warning

janskoyles

Also on news-goldcore-com

Videos

Jerome Powell – The Hawk is back

The Black Friday Stock Market Crash – Gareth Soloway

Inflation Is Everywhere – Kevin Muir Macro Tourist

Blog posts

Jerome Powell – The Hawk is back

Ex Federal Reserve Advisor Danielle DiMartino Booth sees the new Jay Powell as the old Jay Powell. The Chair of the Federal Reserve has pivoted back to his hawkish stance. The “retiring” of the phrase “transitory inflation” signals Jerome Powell intends to tackle inflation head-on and speed up their plans to taper their bond purchase […]

READ MORE

The Black Friday Stock Market Crash – Gareth Soloway

Black Friday 2021 saw the largest stock market sell-off since 1931. Is this the start of a bigger crash, has the trend changed or is this just a one-time blip? We ask Gareth Soloway of InTheMoneyStocks.com what his charts are suggesting and why he is so bullish on gold Watch the Video to Learn More […]

READ MORE

Why Governments Hate Gold

Do governments hate gold?  The answer: Yes — Governments hate gold because they cannot print it, and it is difficult for them to control. Because they cannot print it or easily control it, gold has little use to them during the never-ending schemes to tax and then redistribute wealth. India is a recent example of […]

READ MORE

Featured

How High is Too High for Rising Government Bond Yields?

READ MORE

Gold, the Tried-and-True Inflation Hedge for What’s Coming!

READ MORE

Silver – 7 Reasons it is Still Set to Soar

READ MORE
Newsletter
Category
Archives
Popular

No posts available

Videos

Jerome Powell – The Hawk is back

The Black Friday Stock Market Crash – Gareth Soloway

Inflation Is Everywhere – Kevin Muir Macro Tourist

Blog posts

Jerome Powell – The Hawk is back

Ex Federal Reserve Advisor Danielle DiMartino Booth sees the new Jay Powell as the old Jay Powell. The Chair of the Federal Reserve has pivoted back to his hawkish stance. The “retiring” of the phrase “transitory inflation” signals Jerome Powell intends to tackle inflation head-on and speed up their plans to taper their bond purchase […]

READ MORE

The Black Friday Stock Market Crash – Gareth Soloway

Black Friday 2021 saw the largest stock market sell-off since 1931. Is this the start of a bigger crash, has the trend changed or is this just a one-time blip? We ask Gareth Soloway of InTheMoneyStocks.com what his charts are suggesting and why he is so bullish on gold Watch the Video to Learn More […]

READ MORE

Why Governments Hate Gold

Do governments hate gold?  The answer: Yes — Governments hate gold because they cannot print it, and it is difficult for them to control. Because they cannot print it or easily control it, gold has little use to them during the never-ending schemes to tax and then redistribute wealth. India is a recent example of […]

READ MORE

Featured

How High is Too High for Rising Government Bond Yields?

READ MORE

Gold, the Tried-and-True Inflation Hedge for What’s Coming!

READ MORE

Silver – 7 Reasons it is Still Set to Soar

READ MORE