Stock Market Selloff Showed Gold Can Reduce Portfolio Risk 

– Recent stock market selloff showed gold can deliver returns and reduce portfolio risk

– Gold’s performance during stock market selloff was consistent with historical behaviour

– Gold up nearly 10% in last year but performance during recent selloff was short-lived

– The stronger the market pullback, the stronger gold’s rally

– WGC: ‘a good time for investors to consider including or adding gold as a strategic component to their portfolios.’

– Gold remains one of the best assets outperforming treasuries and corporate bonds

A recent World Gold Council (WGC) study has concluded that the market selloff on February 5th made the case for gold as both a diversifier and an asset that protects portfolios during market downturns.

The stock market selloff of early February saw stocks tumble. But, whilst it was sharp it was also short-lived. Many watching the gold price were disappointed to see gold lose around 0.8% of its USD price between February 5th and February 12th, when both the Dow Jones and European stocks and begun to recover losses.

Yet to judge gold on its price performance alone is to misunderstand gold (or, in fact any asset’s) role in a portfolio. In order to appreciate it’s performance one must compare it to other assets as well as it’s long-term behaviour.

Gold’s protection was stronger than you realise

Whilst gold did drop by nearly 1% in USD terms it was a different story for other currencies (which account for 90% of gold demand). This was particularly the case in Europe where currencies weakened against the dollar, increasing gold prices. In euro terms old rallied by 0.9% and 1.8% in sterling, between Friday February 2nd and Monday February 12th.

The 0.8% overall drop in the gold price over the beginning and end of the stock market selloff was not reflective of gold’s performance during the period:

‘[Gold] still outperformed most assets on the week (other than treasuries) and reduced portfolio losses, providing liquidity to investors as market volatility rose.’

“Gold’s effectiveness as a hedge increases with systemic risks”

Gold and stocks are inversely correlated in market downturns. This is thanks to the behaviour of investors who typically show a ‘flight-to-quality’ behaviour.

This benefit of gold is better seen when market crises are broader or last longer than the stock market correction we saw in February.

Examples include Black Monday, the 2008–2009 financial crisis and the European sovereign debt crisis (Chart 5). But there are exceptions.

Gold has been more effective as a hedge when a market correction has been broader (i.e. affects more than one sector or region) or lasted longer.

During the 2001 dot-com bubble burst, the risk was mainly centred around tech stocks and was not enough to elicit a strong reaction from gold; it was not until the broader US economy fell into recession that the gold price responded more sharply. Similarly, investors outside of Europe discounted the possibility of a spill-over from the 2015 Greek default. In recent pullback, as stocks quickly rebounded, gold’s reaction was more muted.

However, taking a longer, more strategic view, is quite relevant.

Looking beyond the short-term stock market selloff

As we often discussed, mainstream media and market comme