Funds expert bets on gold as a hedge
Gold has traditionally been considered a refuge for investors seeking shelter from a volatile stock market, though the big market tumble this month may have been an exception.
Despite the market’s first correction, or drop of at least 10 percent from a recent peak, in two years, there wasn’t much of a flight to gold or other safe-haven assets. In fact, the price of gold pulled back somewhat along with the drop in stocks, though it has held above $1,300 an ounce this year. The precious metal is up 7.5 percent over the past 12 months.
One reason the steep market sell-off might not have spurred a big move to gold is many economists and Wall Street experts still project strong global economic growth and improved company earnings this year.
Still, many market strategists also expect that Wall Street’s long period of relative calm is at an end. Unlike 2017, investors are now increasingly jittery about the possibility that inflation could begin rising this year and lead the Federal Reserve to speed its timetable for interest rate hikes, concerns that have driven bond yields sharply higher lately.
Commodities like gold tend to act as good hedges against inflation and the weak dollar, which has been relatively softer since last year.
In light of that tug-of-war between a strong market outlook and concerns that inflation could stage a comeback, what are the prospects for further gains in gold funds?
Tushar Yadava, investment strategist for US iShares at BlackRock, weighs in. BlackRock’s funds include the iShares Gold Trust ETF, or exchange-traded fund, which invests in physical gold.
Answers have been edited for clarity and length.
Q: How is the market for gold faring this year in light of the recent market correction?
A: Gold as a portfolio hedge and as hedge in terms of signs of stress is doing exactly as advertised. It’s delivering that diversification benefit, and it has done that, especially through the volatility over the last couple of weeks.
What we do find maybe interesting or slightly different is the long-term outlook here. When you’re in an environment where equities sold off, in part, because of a shock to real rates or interest rates or the inflation outlook as a whole, typically that’s not the best environment for gold overall. But it’s working as a great diversification benefit at the moment.
Q: Many economists expect interest rates to rise this year. How is that likely to affect the gold trade?
A: What I would say is, gold doesn’t have any cash flows. It is purely a stored value over time, so it is susceptible to inflationary trends and it is susceptible to when real rates are rising, maybe losing some of its relative attractiveness. At any point in time when you’re a holder of gold, you’re holding it to diversify away from the current environment. That is a factor that’s out there, obviously, relative to if the economy is doing really, really well, real rates are rising and earnings for equities are increasing over time. So it might not be the best relative holding over that period of time.
Q: The 2018 outlook for the U.S. economy and company earnings remains strong. At the same time, there’s a likelihood of higher interest rates and more market volatility. Where does a gold hedge fit into this?
A: We think the global economy has room to run, even though a lot of that expansion occurred in 2017. We think there’s room to run in an expansionary outlook, but we also think inflation is probably making a comeback. Again, with all these factors as you’re weighing them, gold is the hedge, it is the strategic holding to be a diversifier in your portfolio. And we are not viewing gold as some sort of tactical asset allocation bet. I would say, if you have this tactical view of gold, you probably have a darker view on the world. I would argue that gold is being that hedge, that strategic diversifier. And the reason that you would hold it.
Gold is also obviously going to be a go-to safe-haven that you’re looking at on days when geopolitical risk is flaring.