Keep it brief
- 2018 was an unusual year: stocks and bonds were positively correlated whilst delivering negative returns, forcing a rethink of portfolio diversification.
- Add to this the shift towards a late-cycle environment, resulting increase in economic uncertainty and heightened equity volatility, and building portfolio resilience becomes essential.
- Commodities play an important role in building this ballast, and we look to gold in particular as offering diversification through physical gold or gold equity ETPs.
- Investors have been paying attention too; we are in the midst of the longest buying streak in gold ETPs in over two years.
Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Diversification and asset allocation may not fully protect you from market risk.
Gold as a portfolio diversifier
- Commodity exchange-traded products (ETPs) – especially gold – tend to have low correlations with equity markets on the whole.
- Over both a five year and one year investment horizon the correlation coefficient between commodities and developed market (DM) equities is close to zero. The correlation decreases over time – indicating diversification benefits increase over a longer time period.
- Tactical tailwinds have increased gold’s attractiveness; taking into account a faltering US dollar rally, coupled with slowing global growth and continued geopolitical uncertainty.
Chart 1: Rolling correlation of gold to world equities, 2012-2018
Source: BlackRock and Bloomberg. 25 January 2018. World equities are represented by MSCI All Country World Index.
Gold producers as a diversifier within equities
- Gold producers are highly correlated with physical gold – between 0.65-0.85. The high correlation means that gold producers offer significant diversification for an equity exposure.
- Gold producers are almost as negatively correlated to DM as physical gold is (chart 2). Gold producers cost base is also positively correlated with that of traditional industrials – adding another diversification benefit.
- Gold producers do hold up relatively well compared to equities in our analysis of significant drawdowns, but it is important to note that physical gold offers the most effective diversification benefits.
Chart 2: 90-day moving average of the rolling 90-day correlation between gold producers to DM equities, and gold to DM equities
Source: Source BlackRock and Bloomberg, 25 January 2018. DM equities are represented by the MSCI World Index.