Global investment manager BlackRock Inc has warned investors of the declining effectiveness of gold as an equity hedge.
In a blogpost, Russ Koesterich, portfolio manager for BlackRock’s Global Allocation Fund, said: “Gold’s underperformance might be more tolerable for investors, except for the fact that it has also been failing as an equity hedge.”
He noted that gold continues to trade with a positive correlation and beta to equity prices. Looking at weekly data, gold has been rising roughly 0.20 per cent for every one percentage point rise in the S&P 500.
From a portfolio construction standpoint, gold is a “less effective hedge”, he added.
Koesterich noted that during the past three months, gold has declined by roughly 5 per cent. The yellow metal has struggled as real yields — interest rates after inflation — rose from historic lows. Since January, real 10-year yields have risen by around 15 basis points (bps). Consistent with history this has proved a headwind for gold.
He was of the of the gold’s lacklustre performance and rising correlation with stocks might still be forgiven if it were fulfilling another role, that of an inflation hedge.
Unfortunately, gold’s ability to hedge against inflation has been somewhat exaggerated, he said.
“While it is a reasonable store of value over the very long-term, think centuries, it is less reliable across most investment horizons, including the most recent period. Although inflation break-evens, derived from Treasury Inflation Protected Securities (TIPS), have been steadily rising, gold has demonstrated little correlation with daily or weekly moves.”
For investors re-examining their gold position, he suggested that two factors should be considered, real rates and views on the dollar.
More stimulus and improving vaccine distribution suggest the possibility of an economic surge and if that happens, real rates are likely to continue to rise from still historically depressed levels, he noted.
“As has been the case the past month, this will likely prove a headwind for gold,” Koesterich said.
He noted that recovery in gold may take place in case of a a decline or collapse in the dollar.
“While gold’s recent correlation with stocks and inflation has been positive to effectively zero, it is still demonstrating a strong, negative relationship with the dollar. For this reason, gold should probably still be thought of as a dollar hedge. Absent a strong view on a declining dollar, I would own less gold. And for those investors still looking for a hedge, one word: cash,” Koesterich said.