The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products have recently given back some gains, but that does not mean investors abandon gold altogether.
The yellow metal has recently been pressured by, among other forces, a slight uptick in the previously sliding U.S. dollar and expectations that the Federal Reserve will raise interest rates for the third time this year at its December meeting.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs this year.
“Gold is up in an environment in which investors have had little reason to hedge; any market pullback has been both mild and fleeting,” said BlackRock in a recent note. “Yet gold has kept pace with the overall returns of a typical 60/40 portfolio. In other words, this has been an unusual year in that your hedges have not cost you anything in the form of foregone returns.”
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Since the 1970s, gold has returned an average 10% per year, comparable to the S&P 500 average price performance. Over the past 10 to 20 years, gold has also held up, supported by important structural changes in the market, like the economic expansion of emerging markets, increased use of gold as part of foreign reserves by central banks and the rising popularity of gold-backed ETFs.
“But it’s important to note, while the near-term environment for gold is not ideal, there are still good reasons to maintain some exposure, including the diversification benefits,” according to BlackRock. “With the exception of long-dated U.S. bonds, gold continues to be one of the more diversifying asset classes. In most instances of higher volatility, gold provides a hedge against not only equity risk but credit as well. With credit spreads tight (i.e. a sign that bonds are expensive) and U.S. equity valuations still stretched, investors may consider lightening up on their portfolio insurance, but they should not abandon it.”
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.