Gold Investor - SPDR Gold Shares
Gold Investor - SPDR Gold Shares Gold Investor - SPDR Gold Shares
The impact of foreign-exchange exposureInvestors in developed markets take on additional volatility byinvesting abroad. A growing body of research is supportive ofexchange-rate hedging as a superior strategy for most investors.Almost universally, the results show that exchange-rate hedgingreduces volatility in global equity and bond markets, withfixed-income assets seeing the most significant reduction.Chart 1 compares the performance of emerging- and developed-(ex-US) market equities over the past 25 years as seen from aUS-dollar and local-currency perspective. The local-currencyreturn represents what domestic investors in each constituentcurrency area would have earned during the period. The foreignexchangeeffect on returns is mixed. A basket of developedmarket equities in local-currency terms underperformed thesame basket in US-dollar terms by approximately 1% perannum, between 1987 and 2012. For emerging markets theopposite effect is visible. The performance of a basket ofemerging market stocks in local-currency terms was twice thatof the unhedged US-dollar based basket. These results are anatural consequence of a slight depreciation of the US dollaragainst other major developed currencies, but a more visibleappreciation against emerging-market currencies.However, this stark difference belies a mixed underlyingcurrency story. The 1990s saw a period of exchange-rateupheaval for many emerging markets, particularly those thatrepresent sizeable weights in commonly used indices suchas the MSCI EM index, or FTSE EM index. South Americandefaults and the Asian financial crisis saw sharp falls in regionalcurrencies during the decade. Subsequently, since 2002, alarge proportion of those losses have been reclaimed as theemerging-market growth story has played out without anysignificant currency-led crises. Moreover, it is important to notethat foreign investors cannot really achieve local emergingmarketreturns, as these do not incorporate the costs ofhedging, as we will discuss in detail later.Chart 2 shows volatility performance of the same set of indicesover the same time period. For developed and emergingmarkets,volatility in local-currency terms was lower. Volatilitywas reduced by more than one percentage point for emergingmarketequities, and by 2.3 percentage points for developedmarket(ex-US) equities when hedging the foreign-exchangecomponent from a US-dollar perspective. Incidentally, gold’svolatility across currencies is very similar, a by-product of itsoften overlooked unique correlation structure to other assetsand currencies (see Appendix I).Gold Investor | Risk management and capital preservation
US$ Local 2 CurrencyUS$ Local 2 CurrencyChart 1: Average annual return of emerging and developed market equities 1Return (%)35302520EM FX component151050Emerging market equitiesDeveloped world ex US equities1 Computed using gross monthly total returns from December 1987 to October 2012. MSCI EM and EAFE indices used.2 ‘Local’ represents the equity return without any currency-translated gains or losses.Source: Barclays, Bloomberg, J.P. Morgan, World Gold CouncilChart 2: Annual volatility of emerging and developed market equities 1Volatility (%)2520151050Emerging market equitiesDeveloped world ex US equities1 Computed using gross monthly total returns from December 1987 to October 2012. MSCI EM and EAFE indices used.2 ‘Local’ represents the equity return without any currency-translated gains or losses.Source: Barclays, Bloomberg, J.P. Morgan, World Gold Council18_19
- Page 6 and 7: Macroeconomic events: support andch
- Page 8 and 9: In US dollar terms, prices fell dur
- Page 10 and 11: Volatility: low levels belie nervou
- Page 12 and 13: The interaction of all assets on av
- Page 14 and 15: • Strong global equity market per
- Page 16: • The Fed’s preferred measure o
- Page 23 and 24: Chart 4: Emerging market equity cor
- Page 25 and 26: Chart 6: The expected loss from hed
- Page 27 and 28: Chart 8: Regional distribution of g
- Page 29 and 30: Chart 9: Gold consumption per capit
- Page 31 and 32: Chart 11: Performance of emerging-m
- Page 33 and 34: The second period, between 2002 and
- Page 35 and 36: Table 3: Summary of portfolio perfo
- Page 37 and 38: ConclusionExchange-rate risk is a s
- Page 39 and 40: Gold is also used to lower the cost
- Page 41 and 42: Currency-hedged index constructionD
- Page 43 and 44: III: Tail-risk hedging:an internati
- Page 45 and 46: Unlike other assets, gold tends to
- Page 47 and 48: Chart 3: Research findings for opti
- Page 49 and 50: Chart 5: Improvement in performance
- Page 51 and 52: Chart 6: Performance of portfolio a
- Page 53 and 54: The role of gold during possible fu
- Page 55 and 56: ConclusionGold helps investors dive
- Page 57 and 58: IV: Foreign-reserve diversification
- Page 59 and 60: Optimal allocations to goldMethodol
- Page 61 and 62: Chart 1: US dollar as numéraire -
- Page 64 and 65: ConclusionGold should form an integ
- Page 66 and 67: DisclaimersThis report is published
- Page 68: World Gold Council10 Old Bailey, Lo
US$ Local 2 CurrencyUS$ Local 2 CurrencyChart 1: Average annual return of emerging and developed market equities 1Return (%)35302520EM FX component151050Emerging market equitiesDeveloped world ex US equities1 Computed using gross monthly total returns from December 1987 to October 2012. MSCI EM and EAFE indices used.2 ‘Local’ represents the equity return without any currency-translated gains or losses.Source: Barclays, Bloomberg, J.P. Morgan, World <strong>Gold</strong> CouncilChart 2: Annual volatility of emerging and developed market equities 1Volatility (%)2520151050Emerging market equitiesDeveloped world ex US equities1 Computed using gross monthly total returns from December 1987 to October 2012. MSCI EM and EAFE indices used.2 ‘Local’ represents the equity return without any currency-translated gains or losses.Source: Barclays, Bloomberg, J.P. Morgan, World <strong>Gold</strong> Council18_19
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