Much has been made by purveyors of gold on TV cable channels in recent years and one wonders where gold fits into a portfolio. Like all precious metals, and other commodities for that matter, there is no interest or dividend yield…so the inherent commodity’s intrinsic current value is the asset.
When viewing gold, or its surrogate SPDR ETF, “GLD,” you may consider it to be a hedge against the US Dollar. Given that gold is generally denominated in USD, it stands to reason that there is an inverse relationship in value between the two. The real question is whether gold moves against non-US currencies (also called “ROW” – rest-of-world) currencies. And this appears generally to be the case over the long haul. The world is also increasingly becoming more connected in economic booms & busts, thus holding gold inside a portfolio makes some sense. As with anything, a diversified portfolio is something the majority of experts would agree to be wise.
As a commodity, gold can be a wild ride. Follow the volatility index “GVZ” to see gold’s risk. The recent sell-off by George Soros that caused an intraday drop of over 6%, and may have kicked off multiple days of lost value is one indication that buying and holding gold isn’t a straight path upward by any means.
Is gold a hedge against equities? Well…not really. While the S&P sank in mid-2007 relative to gold, for the most part the two indices of SPY and GLD have moved in parallel. Think again if you desire to buy and hold gold as a protection against equities tanking. I just don’t see the protection of gold for an equities portfolio. Selling covered calls or buying puts in an index like SPY has a much better hedge value, although it isn’t cheap and should be done with expert advice of a financial advisor.
Macro economic factors do play a role in the value of gold unrelated to the Dollar per se. The Associated Press reported on Feb 24, 2013 that India alone accounted for roughly one-fifth of the global purchases of gold in 2012 and is likely to increase that rate in 2013. It seems that young women getting married in India ‘must’ have a considerable amount of bling on their wedding day and families buy and save gold for years in advance of a girl’s forecasted wedding day. If you are able to predict the growth of the middle class in India, and want to make bets on buying gold today…go ahead, but such factors can’t be predicted with certainly.
Government central banks unexpectedly sell off gold without warning to raise capital. Purchases, however, tend to occur over long periods of time, partially so as to not drive prices too high in the process. This is akin to a corporation not buying too much of its own stock at once, although it must disclose such purchases in advance. Central banks do what they want, and when they want it.
So, is gold a hedge? Sure it is in the long haul against US and global currency devaluation. But you can’t eat it, you don’t receive a dividend and it isn’t likely to save you from an equities decline. Owning gold is just one small segment of having a diversified portfolio. Oh…and the real stuff? You had better have it stored safely and make sure you can get to it in a crisis.
As for me? I like stored ammunition…a topic for another post.
- Managing Director