It seems like in today’s raucous markets, there are fewer and fewer places to turn to for safety. Even gold lately has been correlating with the fall in stock prices along with its digital counterpart—Bitcoin.
Gold prices bounced back in Tuesday’s trading session along with stock prices as coronavirus fears were eased with government stimulus plans. Still, it’s been a rocky ride for gold as investors sold off on the precious metal to offset losses in equities.
“Bullion, by itself, is risky, but it’s supposed to provide insurance against inflation and financial crises,” wrote William Baldwin in Forbes. “Investment advisors who advocate allocating 5% or 10% to the metal can come up with hypothetical gold-spiked portfolios that would have looked pretty good in past decades in the trade-off of return against volatility.”
“Gold has held up this year. But it doesn’t always do well during panics and recessions,” Forbes added. “It had a 27% drawdown over an eight-month period in 2008. Its long-term real return is meager. It has a negative dividend: You have to pay a fund to store the bullion.”
Bitcoin purveyors hailed the cryptocurrency as the digital equivalent to gold—an alternative to safety, but that hasn’t been the case thus far.
“Bitcoin fans were hoping that this asset would deliver nice returns uncorrelated with stock returns,” Forbes noted. “That’s magic dust in a portfolio. Van Eck Securities, a money manager trying to get approval for a bitcoin ETF, came to this back-tested conclusion a few months ago: “A small allocation to bitcoin significantly enhanced the cumulative return of a 60% equity and 40% bonds portfolio allocation mix while only minimally impacting its volatility.”
After zooming past the $10,000 mark in mid-February, Bitcoin has fallen to about $5,000 since the capital markets started taking the coronavirus outbreak more seriously.
“I recently checked out the three-year period ended in December,” wrote Baldwin. “Crypto enjoyed a fabulous return and its correlation to stocks (measured with logarithms of daily price movements) was 0%. Magic. The magic ended. So far this year crypto has had a positive correlation to stocks and has suffered an even worse crash.”
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Getting On The Defensive
As coronavirus fears persist, if investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.
RWDC seeks investment results that track the MSCI USA Defensive Sectors – USA Cyclical Sectors 150/50 Return Spread Index. The Index measures the performance of a portfolio that has 150% long exposure to the MSCI USA Defensive Sectors Index (the “Long Component”) and 50% short exposure to the MSCI USA Cyclical Sectors Index (the “Short Component”).
For more market trends, visit ETF Trends.