A recent study by Bloomberg has uncovered exciting new evidence of gold’s usefulness as a hedge against stock market drops.
Bloomberg financial columnist Cameron Crise went back thirty years and studied 10 devastating market periods where stocks dropped more than 20%. He wanted to see how gold reacted during these painful times.
His conclusion was clear: “The notion of gold as a hedge against serious risk aversion is true. Gold looks pretty good as a risk-aversion hedge.”
Crise found strong anecdotal evidence that gold offers a measure of protection from asset market dislocatio. Crise used the CBOE Volatility Index (VIX) as a proxy for market risk.
He found that gold rose almost 7% in 8 out of 10 periods where equities declined over 20%.
WHAT IF YOU MIXED STOCKS AND GOLD?
Crise created two sample portfolios and tracked performance over the last 30 years: the first with a 60/40 mix of stocks and U.S. Treasuries and a 55/35/10 mix with stocks, Treasuries and 10% gold.
The portfolio with gold outperformed by roughly 55 basis points per year!
Over a thirty-year time period, that half a percent per year could make a big difference, especially if the gold allocation also helps reduce overall portfolio volatility.
While what he found shouldn’t be that surprising to readers of this column, it is certainly gratifying to have fresh corroboration. Especially for anyone who has considered adding gold to their IRA or converting a retirement plan like a TSP into a Gold IRA to include precious metals.
Elite investors have long held this view about gold’s role in diversifying a portfolio to help hedge risk.
Ray Dalio of Bridgewater Associates suggests investors should consider adding gold to their portfolios in a world with rising political risks. Greenlight founder David Einhorn thinks gold remains attractive long-term on a thesis that global fiscal and monetary policies are headed in the wrong direction.
GERMANY HAS QUIETLY BECOME A MAJOR GOLD BUYER
Do you know what country bought the most gold in 2016? India and China are often thought to be the biggest gold enthusiasts.
However, according to the World Gold Council, these major players were not the biggest investors in gold in 2016. That title now goes to Germany.
German investors put roughly $8 billion into gold coins, bars and exchange-traded funds last year.
The story behind Germany’s rise as the world’s biggest buyer of gold has been developing quietly over the past ten years. Prior to 2008, the average annual German demand for gold was 17 metric tons. Then the financial crisis hit. That event caused many Germans to seek out other assets and alternatives to their own currency.
German citizens are painfully aware that fiat currencies can become unstable and lose massive amounts of value. In the past 100 years, Germany has gone through eight separate currencies!
It’s not only individual German investors who believe in gold as a store of value but Germany’s central bank Deutsche Bundesbank. The powerful central bank has spent the past four years repatriating 674 metric tons of Cold War-era gold from New York and Paris. Today, German’s central bank has the second-largest gold reserves in the world, following the United States Federal Reserve.
One lesson is clear: gold is still seen globally as a safe-haven asset and an alternative to traditional fiat money. That could only be good news for long-term bullion investors.
IT ISN’T TOO LATE TO PREPARE FOR A MARKET DROP
Today, more than ever before, investors need to consider physical gold for their retirement plan.
Bloomberg’s analysis is strong evidence that gold could help balance out the times when the stock market goes off the rails. Over the last thirty years, it has actually been shown to add positive performance to model portfolios even with just a 10% allocation.
With stock prices trading at nosebleed levels, the next crash in the stock and bond markets is both inevitable and destined to be painful.
Don’t allow complacency to be your downfall. There are coins and bars you can add to the home safe or your IRA that offer you a level of security, privacy and portability no other asset can.
