If one is after a hedge, however, the argument is less convincing, as RBCCM points out in the same note: “Many investors are indeed piling into gold as a hedge against their incremental stock purchases and growing low
quality bond portfolios (WGC), and that hedge has worked out well this year, and it will likely continue to in the near term. However if one thing is true, it is that when a hedge goes wrong, it is often the first holding that investors bail on.”
As a result, it added, the rapid influx of investors could move the other way just as quickly.
“Any signs that risk appetite is returning represents a risk to gold’s upside,” it said.
For Caroline Shaw, head of fund and asset management at Courtiers, while there is a certain logic to the argument that gold can act as an insurance policy, she says the firm tries to use more direct hedges.
“There is nothing worse than a hedge that doesn’t behave like you thought it would, so we make sure that out clients are hedged properly against their long exposure, ie using S&P put options against S&P exposure.
But, Shaw admits she has always been a reluctant holder of the metal.
Summing up the ambivalence many investors are feeling at the moment she said: “There are things that could happen to push the price up further (inflation, uncertainty, Trump in the US) but gold remains an asset that gives you nothing and costs you something.
For these conflicted investors, the challenge is that currently some of the world’s traditional safe bets, like sovereign bonds now do the same, making the choice decidedly less clear cut.
What is clear, however, is that investor sentiment remains for now a major swing factor for price action. The metal has moved largely like a barometer for the market’s faith in the efficacy of central banks. And, in such an environment, while it may not be the perfect hedge there are few others that have worked as well to date.
For those already invested, feelings of vindication are justified, for those considering an investment now, the picture is definitely less clear. But, from a diversification point of view there remains a strong argument for the yellow metal. Just like any insurance policy, a great number of terms and conditions apply, but with so much uncertainty arguably having too much insurance is better than too little.
