Gold has been recognized as a solid store of value since time immemorial. In times of economic and market turmoil, perhaps no asset has received more attention.
As volatility has returned to markets and fears of a looming recession have mounted, so, too, has interest in the precious metal. Indeed, some of the heaviest hitters in the market, from central banks to big private asset managers, have been diligently bulking up their gold reserves. Should investors consider following their lead?
The classic case for gold
We have discussed the utility of adding gold to an investment portfolio in a pair of recent research notes. In the first, we discussed growing interest among market participants in the wake of heightened volatility. In the second, we opined on its usefulness as a general hedge against inflation, market volatility and full-blown crashes.
Thirty years’ worth of market data demonstrates fairly conclusively that gold does not shine all that brightly in times of run-of-the-mill volatility. Indeed, the humble Treasury bill has historically been the better option when it comes to hedging against inflation and choppy markets. When recession hits, however, gold is the real deal. In the past two extended bear markets, gold performed admirably. During the bear market of the Great Recession, for example, gold was up 18.6% even as the stock market dropped 51%.
Big guys loading up
Central banks were big buyers of gold in 2018. In fact, purchases rose 74% during the year. And they are not alone. BlackRock, the huge fund with more $6 trillion in assets under management, has continued to expand its exposure to gold, principally through exchange-traded funds. At the same time, a number of sovereign wealth funds have been expanding exposure and padding out their gold reserves.
Fears of looming recession are certainly the highest they have been in years. Even Bridgewater’s Ray Dalio (Trades, Portfolio) thinks a downturn could start by 2020. Given the volatility and nigh-unprecedented uncertainty in the global economy, it is unsurprising the biggest players and influencers in the market are turning to gold as a hedge.
The overcrowded dollar
Gold is not the only hedge available to central banks and global market participants. Indeed, the U.S. dollar has long been a popular hedge. Unfortunately, as The Economist recently reported, the dollar has become a crowded trade, which has worried some of the biggest market players:
“There are growing concerns that the dollar is a crowded trade. It is as if there are so many people in Grand Central Station that it is impossible to find the person you’re supposed to meet there—or if you do find them, you cannot fight your way out without mishap. It is why gold is starting to appeal again as a spot to converge upon. You would have to mix with some strange people there. But can you really say that you would never visit?”
Gold is clearly providing an attractive alternative to the crowded dollar trade. For investors in the U.S., the attraction to gold might be even greater in the absence of the same level of currency risk faced by foreign market participants.
Verdict
Despite the economy having walked back from the apparent brink late last year, we are nowhere near out of the woods. If anything, underlying fracture lines have only grown. Gold has retained its luster through time for good reason, as Former Fed Chair Alan Greenspan recently opined in a talk hosted by the World Gold Council:
"If gold is a relic of history, why do Central Banks and the IMF still hold over $1 trillion of gold? If it's meaningless, why is everybody still holding it?"
As pessimism mounts, investors might be well served thinking about how to protect their holdings from a coming storm. Emulating the central bankers and top asset managers in this instance might not be a terrible idea.
Disclosure: No positions.
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