Heres Why One Analyst Just Made A "Rare" Call To Buy Some Gold
(September 12, 2018 - Ryan Vlastelica)
Gold prices have dropped this year, but it could be a hedge against a market correction, analyst writes.
Is it time for one of the market’s most traditional hedges, which has fallen out of favor in 2018, to get another look?
Gold prices have tumbled in 2018, dropping despite fears of a global trade war and turmoil in emerging-market economies. Such issues are risks that the market has mostly shrugged off, with the S&P 500 returning to record territory late last month, but the precious metal could be well positioned to provide some safety in the event those factors escalate and start to have a bigger impact on equities, said one analyst.
“Investors do not seem prepared for anything but a continuation of the current upward trend, something that is hard to fathom if U.S. tariffs on $200 billion in Chinese goods go into effect,” wrote Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley Wealth Management.
In such an environment, Shalett suggested that gold could have an important — if minor — place in one’s portfolio. She doesn’t see it as a long-term holding, she wrote in a recent report, but “we believe it can be used tactically as a potential hedge for a stock market correction and/or a reversal in the dollar and real interest rates.” She’s recommending investors take profits on their U.S. equities exposure, while “tactically deploying” 3% to 5% of the portfolio to gold.
“We make this recommendation with all the usual caveats,” Shalett wrote, describing her relatively bullish call on gold as “rare” and adding that her firm’s global investment committee “no longer views gold as a strategic asset class, as it provides no interest or yield — and in the case of physical gold, there is a cost to store it.”
She added, “From an asset allocation perspective, gold’s correlations with stocks and bonds are unstable and it is subject to large sentiment swings around periods of crisis and fear. What’s more, gold has not proven to be a good inflation hedge as it has generated little long-term wealth net of inflation.”
Nevertheless, “in the current environment, we see gold as oversold and the likely beneficiary if recession fears rise and real rates begin to fall, if the U.S. dollar weakens, if market volatility picks up, if there is broadening contagion in emerging markets or if there is an inflation shock.”
In the year to date, gold GCM9, -0.14% is down 8.3%. Meanwhile, the S&P 500 SPX, +0.33% is up 8.1%. Wall Street has been one of the strongest segments of the global economy, with equities in other regions largely struggling. The Vanguard FTSE All-World ex-US ETF VEU, +0.59% an exchange-traded fund that includes markets from every country except the U.S. — is off 7.5% in 2018.
That U.S. stocks have essentially ignored the issues in other markets is a sign of the “complacency” that has pressured gold this year, Shalett wrote, nothing that the precious metal is often used as a “proxy for investor fear and anxiety.” Another such proxy, the Cboe Volatility Index VIX, -4.87% is up more than 20% thus far this year, although it remains at extremely low levels, historically speaking.
