Gold has fallen by about 5% in the past three months. Gold has been struggling as real yields, interest rates excluding inflation, rise from historic lows. In response, Russ Koesterich, portfolio manager of BlackRock Global allocation Fund, made it clear directly in the latest report released on Wednesday that gold, as a traditional safe haven asset, is in an awkward position.
Koesterich points out that 10-year real yields have risen by about 15 basis points since January. Consistent with past history, this has proved extremely bad for gold.
The hedge value of gold is limited.
While the gold price is not performing well, it is not even a good choice to hedge against stock market risk. Koesterich's research found that gold now maintains a positive correlation with the stock market. As can be seen from the weekly data, for every 1 percentage point rise in the s & p 500, gold prices rise by about 0.2%. Although there will still be differences between the two, from the perspective of portfolio construction, this means that gold is not an effective hedging tool.
Interestingly, the positive correlation between gold and high-growth technology stocks is stronger. The correlation between gold and US technology companies has been about 0.5 since the end of September, according to weekly data. In other words, gold and technology stocks are increasingly volatile on Synchronize.
If gold can play its oft-mentioned role as a hedge against inflation, its mediocre performance and rising correlation with the stock market may be forgivable. Unfortunately, gold's ability to hedge against inflation has also been exaggerated.
Koesterich says that while gold is a reasonable store of value in the very long run (think of the past few centuries), it is less reliable for most investments, including recently. One evidence is that while break-even inflation, derived from (TIPS), a US inflation-protected bond, has been rising steadily, gold prices do not have much correlation with their daily or weekly movements.
How to treat gold at present
For investors who want to re-examine the need for gold positions, Koesterich believes there are two factors to consider: real interest rates and views on the direction of the dollar.
More economic stimulus and wider distribution of vaccines indicate the possibility of accelerated economic growth. If that happens, real interest rates could continue to rise from their still historically low levels. As has been the case in the past month, this could depress gold.
So what factors can help gold play a role? The answer may be a depreciation or collapse of the dollar. Although gold's recent correlation with the stock market and inflation has been positive or zero, its negative correlation with the dollar is still strong. For this reason, gold should still be seen as a hedge against the dollar.
"had it not been for strong expectations of a weaker dollar, I would have held less gold," Koesterich said. For investors who are still looking for hedging tools, there may be only one option: cash. "
