Monday, December 21, 2020

Gold ETFs Are Still A Smart Volatility Hedge

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Gold is not bereft of volatility, but the yellow metal is often thought of as a hedge against equity market turbulence. Treasury yields rest near historic lows, and the Federal Reserve has yet to raise interest rates this year. In other words, 2016 has been a pretty year for equities and fixed income exchange-traded funds, but gold ETFs are topping both stocks and bonds.

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For example, the iShares Gold Trust(ETF) IAU is higher by 25.2 percent year-to-date than a 5.7 percent gain for the S&P 500. However, underscoring the point that gold is, in fact, volatile, IAU has been 320 basis points more volatile than the S&P 500 this year.

Volatility, Gold And The Fed

Much of this year’s gold volatility can be attributed to investors’ knee-jerk reactions to Federal Reserve commentary on interest rates. For example, IAU and rival gold ETFs tumbled last Friday after one Fed member said the central bank should not wait too long before raising rates.

Related Link: Gold ETF Fever: Investors Have It

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Gold is more attractive when interest rates because there is no yield on a bond fund, meaning capital appreciation is the only way investors in these products are compensated for taking on gold market risk. With the dollar weak and trillions of dollars (and rising) worth of negative-yielding sovereign debt throughout the developed world, a perfect storm for gold has been brewing for gold this year. Data suggest investors are taking note.

What’s In Store Later This Year?

“While investors appear more convinced that the Federal Reserve (Fed) will indeed hike rates later this year, real yields remain well below where they started the year and even further below their long-term average. In other words, monetary conditions continue to be incredibly loose and supportive of gold,” according to a recent BlackRock note.

Further boosting gold is weak earnings growth in the United States and low and negative yields on sovereign debt throughout the developed world.

Historical data confirm that gold performs well over the last 45 years when the dollar languishes, is solid when the dollar is flat and loses ground when the greenback gains momentum. Still, gold has some merit as a hedge on equity market volatility.

“In months when volatility rose, gold outperformed the S&P 500 price return by roughly 2 percent on average. And it is worth highlighting the reliability of the relationship: In months when the VIX was higher, gold outperformed 62 percent of the time. In contrast, when the VIX fell, gold beat the S&P 500 only 35 percent of the time,” added BlackRock.




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