Don’t Sell Out! Here’s the Benefit of Maintaining Some Gold In Your Portfolio

Given the magnitude of the rally in gold year-to-date, many are questioning whether now is a good time to sell some or all of their holdings in the precious metal…From my perspective, however…I would be reluctant to abandon the asset class because it plays an important role in a portfolio as a hedge [as I explain in this article]…

The comments above and below are excerpts from an article by Russ Koesterich, CFA (BlackRockBlog.com) which have been enhanced – edited ([ ]) and abridged (…) – by  munKNEE.com (Your Key to Making Money!)  to provide you with a faster & easier read.

With U.S. stocks still flirting with their all-time highs and volatility scraping along close to a multi-year low, investors are less inclined to worry about hedging risks and downside protection. Coupled with expectations of rising interest rates, this has led to a modest selloff in gold.

Reasons to Maintain a Position in Gold:

1. Monetary conditions continue to be incredibly loose and supportive of gold…
   • Real yields remain well below where they started the year and even further below their long-term average…
2. Gold has been a cheap and effective hedge against equity volatility.
   • [While] it’s true that market volatility has been unusually low lately it is expected to rise…and gold has been one of the more effective tools…to mitigate the impact of rising volatility…
     • Looking at monthly Bloomberg data from 1994 to the present, changes in the VIX Index, a measure of U.S. equity volatility, explain nearly 20% of the variation in the relative return between gold and the S&P 500 Index.
     • In months when volatility rose, gold outperformed the S&P 500 price return by roughly 2% on average and it is worth highlighting the reliability of the relationship:
     • In months when the VIX was higher, gold outperformed 62% of the time. In contrast, when the VIX fell, gold beat the S&P 500 only 35% of the time.
     • Interestingly, gold’s value as a hedge has historically been most pronounced during those periods when you need it the most. Put differently, historically gold has outperformed equities by an even larger magnitude when volatility is rising from an already elevated level.
     • Again, from 1994 to the present using Bloomberg data, during months when the VIX was already above 20 and rose even further, gold outperformed by an average of nearly 5%, beating the S&P 500 roughly 75% of the tim

Reasons NOT to Maintain a Position in Gold:

For investors comfortable with the notion that the market will continue to advance on the back of an improving economy, there is less of an argument for gold.

• Under that scenario, volatility is likely to remain low while rates will probably creep higher. Lower volatility and higher rates will both be headwinds for the precious metal.

…For those worried about excess complacency and rising volatility, it is worth remembering that gold generally works best in a portfolio when you need it the most.

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