“Gold is known to have relatively low historical correlation to stocks and other major asset classes,” Artigas said. “However, its effectiveness as diversifier goes a bit further. Gold’s historical correlation to stocks when stocks are rising rapidly has tended to be positive, capturing some of the upside. However, when stock markets pull back, the historical correlation has tended to turn negative, as the gold price has historically tended to increase.”
Gold’s Long-Term Return
Furthermore, George Milling–Stanley, Vice President and Head of Gold Strategy for State Street Global Advisors, also highlighted gold’s long-term return, which is not significantly lower than equities and equities have a greater degree of risk. Gold also produces attractive long-term, risk-adjusted returns as the precious metal improves an investment portfolio’s Sharpe ratio.
Artigas argued that gold may strengthen ahead as a hedge against a broad market pullback and rising inflationary pressures. The yield curve is very close to becoming inverted, which has historically been a signal to an eventual recession. Inflation is on the rise, and gold is typically used as an inflation hedge. Meanwhile, net longs are very low, which many buy-and-hold investors often used as buying opportunities.
Gold may also be entering a period of seasonal strength. Artigas pointed out that in the second half, especially in September and November, the market usually experiences seasonally strong gold demand in India and China.
Nevertheless, Artigas warned of some headwinds, such as higher interest rates that increase the opportunity cost of investing in non-yielding gold and a strengthening U.S. dollar that has provided resistance to a breakout in gold.
While the U.S. dollar strengthens, investors may still capture the potential upside in gold without worrying about an appreciating USD. Milling–Stanley pointed out that investors have been quick to seize the opportunity to add to holdings in the SPDR Long Dollar Gold Trust (NYSEArca: GLDW). The dollar-hedged gold ETF may help investors gain exposure to gold bullion price movements to limit the negative effects of potential market volatility, without worrying about an appreciating U.S. dollar.
The SPDR Gold Shares (NYSEArca: GLD), the largest physically backed gold-related ETF on the market, has been the go-to ETF option for gold exposure.
The World Gold Council and State Street Global Advisors also recently expanded on the gold ETF theme with the launch of a new offering that provides the cheapest exposure along with a low share price to those investors seeking exposure to the yellow precious metal. The SPDR Gold MiniShares Trust (NYSEArca: GLDM) has a 0.18% expense ratio and was initially listed at a per-share trading price of 1/100th of an ounce of gold, as represented by the LBMA Gold Price PM (USD).