Gold – The Only Go-To-Asset Class Amid Market Volatility & Global Chaos

Gold – The Only Go-To-Asset Class Amid Market Volatility & Global Chaos from Commodity Trade Mantra

All Roads Lead Only To Gold

Gold prices hit a five-week high of $1,351.20 per ounce last Monday amidst reports of escalating threat of a trade war between the US and China, forcing investors rush to the safe haven gold. The gold prices also rallied on the back of Goldman Sachs analysts turning bullish on the yellow metal for the first time in over five years. The price increase was also fuelled by the appointment of John Bolton as the new national security adviser by Donald Trump, as the new adviser is considered a foreign policy “hawk”, accentuating geopolitical tensions.

The recent upsurge in gold prices is also attributed to the United States’ expulsion of 60 Russian diplomats for a nerve agent attack on a former Russian spy in Britain. Though the precious metal is always considered as the “go-to asset class” during times of political upheaval, it will be interesting to see whether the recent precipitous slide in the stock market will further fuel the surge in gold prices.

Four fundamental attributes of gold in a portfolio

Before we dwell deep into the relationship between stock prices and the yellow metal, let us consider how gold is positioning itself as a must-have in anyone’s portfolio, including large institutional investors.

First gold can be considered as a true and effective diversifier, particularly during times when other asset classes witness heightened volatility. Though other asset classes such as broad commodities, real estate, hedge funds were claimed to be a true diversifier, they failed to pass the test during the 2008-2009 financial crisis, as prices in all these asset classes dropped in tandem with stocks and other risky assets. However, gold has been consistently proved to be a real diversifier both during times of economic expansion and contraction:

Secondly, gold has been providing consistent returns over an extended period of time. The yellow metal’s price increased by an average of 10 percent per year since 1971.

Gold’s performance would be more pronounced during volatile times. For instance, during the recent stock market sell-off on February 5th, the yellow metal rallied strongly and posted higher returns than the short term treasuries:

Gold’s effectiveness in times of uncertainty was evident last month when the yellow metal turned out to be one of the best-performing asset classes year-to-date, outperforming even treasuries and corporate bonds:

Thirdly, gold offers immense liquidity as it is traded in large global markets. According to World Gold Council Report, the precious metal clocks anywhere between $150 billion and $220 billion worth of trades per day through spot and derivative contracts over-the-counter. As gold offers both size and liquidity, the yellow metal figures among the strategic holding for large buy-and-hold institutional investors:

Fourthly, gold buttresses portfolio performance through enhanced risk-adjusted returns. Data points for the 10-year period from 2006 reveal, by adding even 2% in gold, one could have achieved enhanced returns with reduced volatility, resulting in higher risk-adjusted returns. The following graph highlights how someone having higher risk in his portfolio can achieve enhanced risk-adjusted portfolio returns by allocating a higher portion to gold, as the yellow metal offset the risk from other asset classes.

Why Gold Now?

Gold posted record gain of 30 percent in 2010 and since then the price of gold just showed some technical rebounds, with its price hovering in the tight range of $1,050 to $1,350 over the past few years.

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