Another Hedge Bites the Dust

Russ discusses why gold has not been an effective hedge recently.

One of the stranger aspects of this market is the ease of finding returns and the impossibility of finding hedges. As most risky assets continue to grind higher, it is increasingly difficult to find assets moving in the other direction. In recent blogs I’ve highlighted the declining efficacy of bonds as a hedge. Gold should be added to that list.

Back in October I highlighted how gold, which at times can be an efficient portfolio hedge, was increasingly trading with stocks. Since then gold has struggled, both in price terms and as a hedge.

During the past three months gold has declined by roughly 5% (see Chart 1). The yellow metal has struggled as real yields, i.e. interest rates after inflation, rose from historic lows. Since January, real 10-year yields have risen by around 15 basis points (bps); consistent with history this has proved a headwind for gold.

Gold: Price per ounce 2008-2021

Source: Refinitiv DataStream, U.S. Commodity Futures Trading Commission, and BlackRock Investment Institute as of February 19, 2021.

Gold’s underperformance might be more tolerable for investors, except for the fact that it has also been failing as an equity hedge. Gold continues to trade with a positive correlation and beta to equity prices. Looking at weekly data, gold has been rising roughly 0.20% for every one percentage point rise in the S&P 500. True, that still represents a gap in performance, but from a portfolio construction standpoint, it means gold is a less effective hedge.