Gold, an efficient hedge!
In the Investment Update, WGC said, “the benefits of certain portfolio hedges came into clear focus during the 2008-2009 financial crisis and did so again during the subsequent European sovereign debt crisis, the 2018 December stock market pullback and the most recent Covid-19 pandemic.”
Many tail hedges work well during crises if timed appropriately, but are technically complex investments, and can be expensive to hold systematically. Historically, gold prices have not increased as rapidly in tail events1 as in hedges that track market volatility indices.
But, importantly, gold has served as a safe haven, improving risk-adjusted returns and adding welcome liquidity during times of crisis, without the costly effects of systematic implementation or the difficulties of market timing.
The report said, gold stands out as a key portfolio component when identifying a long-term portfolio diversifier. Historically, gold has shown that it acts as an effective hedge and a useful part of the larger tail-risk picture. Volatility-linked hedges like VIX futures and index options are more effective than gold at reducing both portfolio drawdown and volatility, but the long-term returns of a portfolio that includes VIX futures have been almost halved.
While gold is not necessarily the best ‘volatility hedge’, an allocation to gold can not only improve both absolute and risk-adjusted returns when compared to an unhedged portfolio but can also provide the protection needed in times of market stress. And when one factors in the low cost of ownership, the protection afforded, the low level of active management required and the breadth of application, gold can clearly serve as a valuable alternative. (Sooner the report would be carried here.)
