Hedging in gold during a recession

Updated: May 8, 2020 6:53:01 PM

Given the uncertain and volatile state of the stock market for the coming year, investors tend to look for alternatives.

It is widely believed that diversification of asset classes is a good way to optimize portfolio performance.

Global economy is currently under pressure and impact of Coronavirus pandemic has been widespread and severe. Signals from financial markets and global think-tanks, all seem to point towards a recession.

Earlier in the month, International Monetary Fund (IMF) projected that the coronavirus outbreak will drive a “Great Lockdown” that is poised to be the worst recession in nearly a century.

In its latest World Economic Outlook report, the IMF projected Global Gross Domestic Product to slide by 3% this year under the assumptions that the pandemic threat fades in the second half of the year. The previous forecast saw global GDP growing by 3.3% in 2020, a stark reminder of what economists expected before the rapid coronavirus outbreak tanked economies in a matter of weeks. U.S. GDP growth for 2020 was revised to (-5.9%), Eurozone to (-7.5%) and India to 1.9%.

World economy growth projections

U.S. 10 year Treasury yields have declined to record lows, while the market fear depicted by the VIX has shot up to record highs. Investing in Gold: Is the yellow metal a hedge in a recession?

Given the uncertain and volatile state of the stock market for the coming year, investors tend to look for alternatives to provide a boost to the return profile of their portfolios.

It is widely believed that diversification of asset classes is a good way to optimize portfolio performance in volatile markets. It should also be noted that a complete exit from equities isn’t optimal. (refer to our previous posts on the importance of staying invested in the market through all periods).

In this post, we explore the potential of Gold, widely regarded as a “store of value” for many centuries in helping portfolios . The below table shows the performance of gold during the previous recessions.

Performance of gold during recessions
Performance of gold during recessions

Gold outshined the S&P 500 in most of the recessionary periods and has done exceedingly well in some. During the recession of 2008-2009, that was a result of the financial crisis then, Gold delivered stellar absolute returns of 11.4% while the S&P lost almost 37.1%.

Fortunately, innovations in capital markets have vastly simplified the options to invest in Gold. Gold ETFs provide a simplified way to gain exposure to the bullion. Gold ETFs are traded like any other stock on the exchange. Thankfully, we have evolved from days in the past when investors had to stock up on gold bars or coins and go through the painful process of trading while running the risk of theft.

Leading Gold ETFs

International Gold ETFs can also appeal to investors aiming to diversify into different asset classes and simultaneously invest outside their local currencies. Do your research, analyze your risk preferences and give the yellow metal a thought.

Gold that glitters may provide the much needed shine to your portfolio!

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