One of the biggest movers and shakers in financial markets this year has been gold. Although interest in the yellow metal has ebbed and flowed over 2019 so far, you can't ignore the fact that gold prices have surged from US$1,286 an ounce at the start of the year to today's level of US$1,494 (at the time of writing) – a rise of 16%.
It gets even more interesting if you check out what's happened to gold in Australian dollars. Back in January, Aussies had to fork out $1,836 for an ounce of gold, but today, that same ounce will cost $2,187 (again at the time of writing). This means that gold has appreciated 19.1% down under in 2019.
ASX goldminers have done even better – just take a look at the share price of our largest goldminer Newcrest Mining Ltd (ASX: NCM). NCM shares have shot up over 50% year-to-date so far for its lucky investors.
But why has this been happening? After all, gold is usually thought of as the inverse 'safe haven' asset that only goes up when stocks are falling. And the S&P/ASX 200 (INDEXASX: XJO) index is up over 20% for the year (as are the US markets).
Gold's new glitter
There's no simple answer, but I think it's a combination of aggressive hedging and record low interest rates.
Bonds are the traditional way of hedging against stock market downturns. The traditional portfolio recommended in the US financial space is the 60/40 (60% stocks, 40% bonds) – recommended because bonds typically outperform stocks in a bear market.
But record low interest rates have meant that bonds have become a risky asset themselves.
After all, a US 10-year Treasury note will today pay you a coupon of just 1.79% over the next decade (not much upside in that).
As rates have fallen, I am guessing that many investors who would normally stick with bonds have been branching out into gold as a hedge. Gold offers no yield, but compared to a 1.8% T-bill, there's not much difference and many investors understandably are going for a physical asset.
Where to from here?
Well, that's the $64,000 question. Hedge fund king Ray Dalio has been a public spruiker of gold as way to protect against a new era of easy monetary policy – recommending investors allocate 5–10% of their portfolios to gold. Mr Dalio has a great track record of macroeconomic analysis, so maybe his words are worth heeding. We certainly are in a brave new world.
