(Kitco News) - Even above $3,600 an ounce, there is still plenty of value in gold, and it can continue to be a valuable diversification tool for investors, according to the world’s largest asset manager.
In his latest commentary, Russ Koesterich, Managing Director and portfolio manager of BlackRock’s Global Allocation team, reiterated his bullish outlook on gold; however, he has added some nuance to this position.
In a commentary published in late March, Koesterich said he was bullish on gold as a long-term hedge against falling interest rates and currency debasement. In his latest note, he is now recommending the precious metal as a hedge against potential market volatility.
After a disappointing start to the year, momentum in the S&P 500 has picked up, with the index returning to record highs. While Koesterich remains bullish on equities, he added that risks are growing in the marketplace as volatility has dramatically fallen.
“Since May, investors have done best rotating back into U.S. equities,” he said in a note. “While I still believe stocks will end the year higher, we are entering a time of year when volatility tends to rise. Given this short-term dynamic, I would advocate adding a bit more gold to portfolios.”
Koesterich said that in the current environment, he would recommend investors hold between 2% and 4% of their portfolio in gold.
“In the short term, there may be an argument for taking the allocation towards the upper end of the range. If volatility rises, as it typically does in the fall, gold tends to post strong relative performance versus stocks,” he said.
In a year that has been extremely volatile and filled with economic and geopolitical uncertainty, Koesterich noted that the VIX Index, the market’s broad fear gauge, has recently dropped below 15 points, its lowest level since February.
“Even a modest uptick in equity market volatility can favor gold. Looking back at the past fifteen years, there has been a very consistent relationship between how gold performs relative to stocks and weekly or monthly changes in implied volatility,” he said. “A 20% spike in volatility has historically been associated with an average weekly outperformance of 3%; in the rare instances when the VIX spiked 50% or more, the average outperformance for gold is more than 5%.”
