Gold is up by 9.2% so far this year. This surprised many market participants as most analysts predicted lower prices. Some investors took advantage of last year’s price correction to buy gold but investment demand has remained tepid.
We consider that the current environment of high bond issuance, tight credit spreads and record low volatility continues to offer a prime opportunity for investors to add gold.
In our view, gold can reduce overall portfolio risk and it is cheaper to implement than many volatility-based strategies.
Market risk and low volatility: good reasons to own gold going into H2 2014
Faced with low interest rates, investors continue to look for better returns across multiple asset classes (our latest issue of Gold Investor discusses the surge of alternative assets).2 However, alternatives have not been the only assets to benefit.
Besides various equity markets, higher-yielding (and lower-quality) bonds have been a sought- after component in investor portfolios. As a consequence, credit spreads have tightened to pre- crisis levels and overall market volatility has reached multi-year lows.
We consider that these two factors support the case for investing in gold for the following reasons:
- An excess of lower-quality bonds (and other fixed income assets) increases risk in the financial system and the likelihood of a market correction
- Volatility appears too low to us and may create an opportunity for investors to buy portfolio protection as a means of prudent (and long-term) risk management.
Looking forward, we believe that investors can benefit by adding gold as a hedge in their portfolios – whether investors see this as a tactical response to the current market environment or as part of comprehensive strategy on long-term risk management.