Investors using gold to hedge against falling equity values must be willing to accept greater volatility than may have been assumed, according to research by consultancy Mercer.
While gold returns held up well during the first quarter at 6%, fluctuations in the value of the metal have increased enormously since mid-February when markets began to respond to the Covid-19 pandemic more seriously, the research found.
However, while gold, as a safe-haven asset, performed well initially, it stumbled in the last few days of February and then experienced a massive correction mid-March.
“Gold is a reliable minute-taker of Federal Reserve meetings, and when the Fed announced what has been referred to as ‘QE Infinity’, gold did what it has done regularly after monetary easing announcements, and shot back up,” the consultancy said.
The mid-March stumble can partly be attributed to some leveraged investors selling the asset that was most liquid and that had gained in price – gold, the consultancy said.
The analysis also found that the same bifurcation of gold bullion and gold equities that occurred in the global financial crisis of 2008 has reoccurred in the current crisis, the research found, with gold equities being sold-off alongside the broader market, while gold bullion performed well.
However, gold equities returned 4.8% ahead of the broad equity market over the quarter.