Portfolio Risk Management & Analysis

GOLD in Portfolio Risk Mamagement

When the asset market was down across the board in Q4 of 2018, institutional investors started eyeing gold as a hedge. But the equity market recovered in Q1 of 2019 and gold dipped below the $1,400 per ounce price from which it broke in Q1. Presently we are observing institutional investors going into gold again, especially into ETFs, physical gold and mining stocks. Hedge funds are turning to gold with so many sovereign bonds in negative yield territory. Another thing to note is that the demand for gold by central banks in 2018 was the highest since the closure of the gold window by the US in 1971. It rose by 74% compared to 2017, with Russia leading by a large margin.


gold risk management


While the total return on gold in 2018 was negative, -1,9%, High Yield Bonds and Investment Grade Bonds performed even worse. But gold performed rather well in Q4 of 2018, when all asset prices were depressed. Gold mining stocks gained 17% and gold itself appreciated 7%. As we have already discussed, there are reasons to challenge gold as a store of value. Gold is very volatile and can undergo brief swings in either direction, which can be exploited by short-term arbitrage. Gold is a good diversifier to have in what some economists have come to call “The Everything Bubble Economy”. When the next downturn comes, gold will likely be a good choice for an equities hedge, given that so many sovereign bonds are in the negative yield territory. Recently there has been a lot of fintech innovation with some promising integration of gold’s hedge value into new architectures. But the advantage that gold still holds is the trust it has developed over centuries, while new fintech still has to prove itself.



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