Gold Investor - SPDR Gold Shares
Gold Investor - SPDR Gold Shares Gold Investor - SPDR Gold Shares
Portfolio impact of hedging exchange-raterisk and using goldAs we have seen, there is a compelling case for gold tocomplement a currency hedge on foreign investments,particularly emerging-market equities. However, the broadereffects of a gold allocation can only be analysed in the contextof other assets held by investors.Asset and period selectionWe analysed the impact on a typical portfolio of an emergingmarketcurrency strategy using gold. The portfolio describedin Chart 13 includes a 10% allocation to emerging-marketequities. 24 A complete list of the corresponding indices usedthroughout this study can be found in Table 4 in Appendix III.Based on data availability, and following similar methodologyto previous World Gold Council research, our analysis focusedon the period between 1987 and 2012. 25 However, from anemerging-market perspective, the period can be split into twodistinct parts.The first period, between 1987 and 2001, was characterised byemerging-market currency depreciation, at least two notableregional emerging-market crises and significant interest-ratedifferentials. This suggests foreign-exchange hedging wouldhave been a prudent choice for investors throughout this period,given depreciating currencies and violent currency swingsduring the crises. However, mitigating the case for hedgingwould have been the significant cost drag from executing ahedging strategy.Chart 13: Portfolio breakdown by asset classCash 5%US bonds 35%Global bonds 10%US equities 25%Developed world equities 10%Emerging market equities 10%Commodities 5%Source: Barclays, Bloomberg, J.P. Morgan, World Gold Council24 While a 10% allocation is indicative, the conclusions of this analysis can be adapted to different portfolio compositions depending on the asset allocationand the foreign asset exposure.25 These include Gold: hedging against tail risk, October 2010; Gold: alternative investment, foundation asset, October 2011; and The strategic case for goldfor UK investors, June 2012.Gold Investor | Risk management and capital preservation
The second period, between 2002 and 2012, was alsocharacterised by high interest-rate differentials but emergingmarket currencies that were generally appreciating. This periodwould have made the case for foreign-exchange hedgingweaker as emerging market currencies were, on average,strengthening and costs would have clawed back a sizeableportion of performance (as seen by a 218 basis point reductionin return in Chart 14. Further, the period of 2002-2012 wasmarked by stabilisation in emerging market economies andincreased inflows. For most investors, this period is morerelevant as it coincides with the period when major inflowsinto emerging markets began. Splitting the period in two isalso important because the case for hedging foreign-exchangerisk prior to 2001 was compelling, but was less so thereafter.This underlines the need to hedge currency risks but poses thequestion of how to do this in the most effective manner.Chart 14: Returns of emerging market indices during 1987 – 2001 and 2002 – 2012Return (%)454035302520151050December 1987 – December 2001 January 2002 – October 2012EM unhedged EM FX hedged EM localSource: Bloomberg, World Gold Council30_31
- 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 20 and 21: The impact of foreign-exchange expo
- 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: Chart 11: Performance of emerging-m
- 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
The second period, between 2002 and 2012, was alsocharacterised by high interest-rate differentials but emergingmarket currencies that were generally appreciating. This periodwould have made the case for foreign-exchange hedgingweaker as emerging market currencies were, on average,strengthening and costs would have clawed back a sizeableportion of performance (as seen by a 218 basis point reductionin return in Chart 14. Further, the period of 2002-2012 wasmarked by stabilisation in emerging market economies andincreased inflows. For most investors, this period is morerelevant as it coincides with the period when major inflowsinto emerging markets began. Splitting the period in two isalso important because the case for hedging foreign-exchangerisk prior to 2001 was compelling, but was less so thereafter.This underlines the need to hedge currency risks but poses thequestion of how to do this in the most effective manner.Chart 14: Returns of emerging market indices during 1987 – 2001 and 2002 – 2012Return (%)454035302520151050December 1987 – December 2001 January 2002 – October 2012EM unhedged EM FX hedged EM localSource: Bloomberg, World <strong>Gold</strong> Council30_31
Change language