Bank on gold for portfolio resilience

As gold has a negative correlation with real rates, and a low or negative correlation with other asset classes, it provides an insurance for portfolios. Adding gold helps to lower portfolio volatility...
Chief Investment Office08 Aug 2019
Photo credit: AFP Photo

What happened?  

Gold prices have rallied as negative-yielding bonds reach a record high. The value of negative-yielding bonds surged last week (ended 2 August) by USD1.4t to USD15.0t. Negative-yielding bonds now make up 27% of the global Investment Grade (IG) universe – a record high. As the value of money erodes, gold is increasingly seen as a stable store of value (Figure 1).

As a non-interest-bearing asset, the cost of holding gold can be high, as it means losing out on the yields an investor would otherwise obtain from investing at risk-free rates. But given today’s environment with negative-yielding bonds and  plummeting global yields , the cost of holding gold has decreased significantly.

What does this mean?

Investors should hunt for assets which will retain the value of their portfolio and have low or negative correlation relative to the rest of the markets.

Today, policies of global central banks have the effect of depreciating the value of money, making it imperative for investors to protect the value of their portfolios.

Also, gold, as a safe-haven asset, has a generally negative correlation with real rates. Thus, in today’s environment of low to negative real interest rates, gold is set to benefit (Figure 2).

Furthermore, gold’s historical correlation with various asset classes is low. Indeed, for the past 10 years, gold has had a very low correlation with equities and moderate correlation with bonds and commodities (excluding silver). Gold also has no credit risk and boasts lower volatility than equities or commodities, thus improving a portfolio’s risk-return profile. This makes it an efficient portfolio diversifier.

Investment demand for gold through Exchange-Traded Funds (ETF) has also returned. Though current global gold ETF positions are still below 2012’s peak, it is clear that investors have been increasingly purchasing gold ETFs in recent months (Figure 3).

What should you do?

Have exposure to gold – it is an effective portfolio diversifier, given its low historical correlation with various asset classes. With no credit risk and lower volatility than equities or commodities, gold can improve a portfolio’s risk-return profile in the long term.

Figure 1: Negative-yielding bonds has surged, and gold as a hedge, has rallied

Source: Bloomberg, DBS

Figure 2: Gold has a negative correlation with real rates

Source: Bloomberg, DBS

Figure 3: Total global gold ETF holdings is below 2012’s peak

Source: Bloomberg, DBS

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