Gold: The 2024 Equity Hedge

Markets breathed a collective sigh of relief regarding the Fed’s rate cut outlook remaining unchanged. With three potential rate cuts forecast for this year, gold remains an attractive equity hedge.

Increased economic activity in recent months caused concern over potential changes to the Fed rate path. Investors mulled whether rising demand and a tight labor market alongside sticky inflation would cause the regulatory to change course.

Those worries, for now, remain unfounded as the Fed revealed on Wednesday that it still anticipates cutting rates by 0.75% this year. Falling rates will lead to weakening in the U.S. dollar. In turn, this makes gold increasingly attractive for its store of value as well as an equity hedge. Falling interest rates historically benefit gold.

"Gold is still one of our favorite trades for 2024 as an attractive portfolio hedge for equity investors," Bank of America Research wrote in a note yesterday, reported Reuters.

Concerns of equity valuations continue to plague markets as well. Add in the potential knock-on effects of a depreciating dollar, and hedging for equity risk holds strong appeal this year. A 2018 study titled "Is Gold a Sometime Safe Haven or an Always Hedge for Equity Investors" analyzed the correlation of gold against equities through a number of time periods. The authors concluded that while gold doesn't offer a significant safe haven during market crashes such as the great financial crisis; it provides a steady equity hedge.

"We think that a review of the results from earlier papers on this issue, coupled with our findings, points to the fact that gold is always a Hedge," He, O'Connor, and Thisjessen, the authors, wrote. That or, "at worst, always an excellent diversifier of portfolio risk."