Myth Busted! Gold Hedges Are Good Against Risk – Bloomberg
(Kitco News) - There’s much debate on whether gold is a good hedge against market risk. But one analyst seems to have busted the myth and thinks the metal can indeed protect investors.
“The notion of gold as a hedge against serious risk aversion is true,” said Cameron Crise, a macro strategist and the author of Bloomberg’s popular Macro Man column.
Crise began his investigation by asking: “Is gold really an effective hedge in periods of risk?”
The strategist took a “Mythbusters-style” approach to get his answer and used the CBOE Volatility Index (VIX) as a measure of market risk aversion to figure out how much and to what extent equity volatility impacts gold prices.
Crise used monthly data from 1990 to 2015 and although his findings showed that the VIX’s effect on the yellow metal was not as big as that of inflation or the real U.S. 10-year yields, the relationship between volatility and gold was clearly a positive one.
“The VIX appears to be a significant statistical driver of changes in the gold price over a meaningful period of time. Based on this evidence, it looks as if claims of gold as a risk-aversion hedge might be true,” he said.
Screenshot of Crise's Multifactor Regression
The macro strategist then examined gold’s price action against ten big historical events that took place over the past three decades, including the 9/11 attacks and the latest global financial crisis.
Crise’s analysis once again pointed to gold being a reliable hedge against risk, with gold rising on average almost 7% per episode.
Screenshot of Crise's 10 Historical Events
Crise then compared different portfolio allocations with gold, notably the 60/40 stocks & bonds asset mix versus the 55/35/10 mix. The latter reduced stocks and bonds holding by 5% each and replaced them with gold.
The result was that a portfolio with a 10% gold allocation outperformed the 60/40 portfolio by about 55 basis points per year.
“My bias and expectation were to find that the putative relationship between gold and risk aversion was simply a myth. Yet the statistics appear to show a relationship, and anecdotal evidence supports the notion,” Crise said.
“Given the solid performance of a portfolio including gold and the chance that the comfort of owning some might prevent investors from panicking at the height of a crisis, I have to conclude that the notion of gold as a hedge against serious risk aversion is true.”