London, July 21 (HNA) – Historically, gold prices have not increased as rapidly in tail events, as hedges that track market volatility indices, World Gold Council (WGC) pointed out in a WGC analysis, delivered by the Goldhub.
“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” read the analysis.
“We have established the Relevance of gold as a strategic asset and the importance of portfolio diversification, but in this analysis, we look specifically at gold’s role as a hedge compared to other well-established hedges.
“We focus on volatility and credit hedges as well as real assets, particularly precious metals, and adjust the amount of a given hedge in a portfolio depending on the risk exposure of that portfolio.
“Finally, we ranked the effectiveness of each hedging strategy based on attributes including returns, portfolio volatility, risk-adjusted returns, and portfolio drawdown.
“Our analysis shows that, historically, any of the hedging choices are better than a diversified hypothetical portfolio without hedging. And while each of the choices has merit in various market conditions, our analysis shows that historically, gold is generally the overall optimal hedge over the long run when considering these attributes.
“Hedging tail events is often a compromise between the greatest protection and cost
We often highlight gold’s role as a safe haven, most recently in our Investment Update:
“Gold prices swing as markets sell-off, which shows that gold can provide liquidity and protection in risk-off scenarios, especially during so-called systemic events that affect multiple regions and industries.
“When stock markets sell-off quickly, the correlation across risk-assets can increase and portfolios that were thought to be diversified could experience unexpected drawdowns, forcing margin calls and low funding ratios.
“Investors often rely on selling highly liquid assets like gold in these events, which can sometimes lead to temporary liquidations, as seen in the recent Covid-19 selloff.
“While correlation for most major asset classes, including gold, increased meaningfully during the most recent stock market selloff, gold’s correlation to the stock market remained flat to slightly negative.”