Gold Investor - SPDR Gold Shares
Gold Investor - SPDR Gold Shares Gold Investor - SPDR Gold Shares
Currency tail-risk hedging using goldA currency-hedging strategy including gold also provesbeneficial for portfolios during historical tail-risk events. Gold,during times of crises, typically reduces the losses experiencedby risky assets, including emerging market equities. Theseevents include crises that are systemic in nature. For emergingmarkets, such events are often either related to or causeddirectly by the country’s currency and debt markets.Chart 15 shows the improvement in portfolio performance thata 50/50 combination of gold and an emerging market currencyhedgingstrategy had over fully-hedged and fully-unhedgedstrategies during the eight tail-risk events under consideration.The 50/50 combination portfolio outperformed the unhedgedportfolio during six out of the eight events and outperformed thecurrency-hedged index during five of the events. Moreover, the50/50 combination hedged portfolio outperformed an unhedgedstrategy by an average of 30 basis points, and collectively by atotal 240 basis points over the eight events under consideration.Similarly, it outperformed a fully currency-hedged strategy by anaverage of 14 basis points, and 111 basis points collectively overthe same period. Consistent with previous World Gold Councilresearch, gold is shown to reduce losses or improve gainsduring times of market stress. 27Using gold as a currency-hedge overlay going forwardWhat type of environment do investors expect going forward?Interest rate differentials are set to remain high for sometime due to a combination of low rate policies in developedmarkets and structurally higher rates in emerging markets.These policies are likely to see emerging market currenciescontinue to outperform as global imbalances, which werepartly the cause of the global financial crisis, are righted. Thisoutperformance will also go hand in hand with economicgrowth – a key long-term fundamental driver of gold demand.Also, given the macroeconomic and financial events of the pastfew years, it would be foolhardy to believe that future crisesare unavoidable. Given the emerging markets’ growing shareof global trade, global wealth and investors’ global portfolios,it is logical to expect that any crises emanating from theseeconomies are likely to have a greater global impact. Based onits characteristics as a tail-risk hedge and liquid unit of exchange,gold should strongly react during periods of crisis. The casefor gold as a complement to a foreign-exchange hedge overlayremains strong – mitigating the cost drag from hedging whileproviding protection from tail events.Chart 15: Outperformance of portfolios with a 50% gold overlay on EM index*Basis points150Total outperformance: 240 basis points100500-50-100-1501997 Asianfinancial crisis1998 Russiadefault2002 ArgentinadefaultTotal outperformance: 111 basis pointsSeptember 11 2002 recession Global financialcrisisSovereign debtcrisis ISovereign debtcrisis IIGold overlay vs unhedgedGold overlay vs FX hedged* This chart shows the outperformance of a portfolio with 50% FX hedge/50% gold overlay EM index relative to two other portfolios: one with an unhedgedEM index and another one with a currency-hedged EM index. Please refer to Table 5 in Appendix III for event dates.Source: Barclays, Bloomberg, World Gold Council27 World Gold Council, Gold: hedging against tail risk, April 2010.Gold Investor | Risk management and capital preservation
ConclusionExchange-rate risk is a significant issue for investors allocatingassets abroad. Empirically, back tests show that exchangeratehedging provides benefits to developed market investorsthrough higher returns on emerging-market holdings, aswell as lower volatility across all global assets. However, thepast decade has brought significant changes in the globaleconomic landscape that have altered conventional wisdomabout exchange-rate hedging. As a result of robust growth inemerging markets and ongoing problems in developed markets,interest-rate differentials have once again been expanding andconsequently exchange-rate hedging costs have increased.Given the current trade-off between costs and benefits ofhedging, many investors might opt to leave their allocationsunhedged. After all, as globalisation expands, systemic risksmay appear as likely at home as abroad. However, whileemerging-market crises were regionally contained in the past,the increasing weight of these markets in global GDP, tradeand investor portfolios suggests a greater risk of contagion inany future crisis. In that context, there is a strong argument forsubstituting or complementing existing exchange-rate hedgingstrategies using gold.Gold’s foreign-exchange-hedging characteristics are uniqueand represent an additional benefit to a strategic allocation. Itis critical to note that our body of research has shown that anallocation to gold in the range of 2-10% is optimal for investorsacross a band of risk appetites. Gold’s foreign-exchange hedgingcapabilities further emphasise its versatility as a portfoliocomponent.Given the low cost of a gold allocation – from transaction,monitoring and carry perspectives – its positive relationship withthe emerging-market growth cycle and its application as atail-risk hedge, gold makes an attractive alternative to traditionalexchange-rate hedging programmes. Results of our analysisshow how gold can reduce portfolio drawdown for investorswith emerging-market allocations relative to a foreign-exchangehedge. In addition, gold as a discrete allocation increases riskadjustedreturns by lowering volatility. The most effective periodfor this strategy has been the last decade, not merely becausegold has been in a rising price environment, but because globalcrises have garnered a greater response from gold than before.Emerging-market currencies have been rising and interestratedifferentials have been growing. This environment seemsset to stay for the foreseeable future but, most importantly,with emerging markets becoming an increasing feature onthe landscape, investors need to protect their holdings againstunforeseeable risks. Gold’s proven tail-risk hedging propertiesmake it a powerful complement to a foreign-exchange hedge foremerging markets.34_35
- 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 and 32: Chart 11: Performance of emerging-m
- Page 33 and 34: The second period, between 2002 and
- Page 35: Table 3: Summary of portfolio perfo
- 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
Currency tail-risk hedging using goldA currency-hedging strategy including gold also provesbeneficial for portfolios during historical tail-risk events. <strong>Gold</strong>,during times of crises, typically reduces the losses experiencedby risky assets, including emerging market equities. Theseevents include crises that are systemic in nature. For emergingmarkets, such events are often either related to or causeddirectly by the country’s currency and debt markets.Chart 15 shows the improvement in portfolio performance thata 50/50 combination of gold and an emerging market currencyhedgingstrategy had over fully-hedged and fully-unhedgedstrategies during the eight tail-risk events under consideration.The 50/50 combination portfolio outperformed the unhedgedportfolio during six out of the eight events and outperformed thecurrency-hedged index during five of the events. Moreover, the50/50 combination hedged portfolio outperformed an unhedgedstrategy by an average of 30 basis points, and collectively by atotal 240 basis points over the eight events under consideration.Similarly, it outperformed a fully currency-hedged strategy by anaverage of 14 basis points, and 111 basis points collectively overthe same period. Consistent with previous World <strong>Gold</strong> Councilresearch, gold is shown to reduce losses or improve gainsduring times of market stress. 27Using gold as a currency-hedge overlay going forwardWhat type of environment do investors expect going forward?Interest rate differentials are set to remain high for sometime due to a combination of low rate policies in developedmarkets and structurally higher rates in emerging markets.These policies are likely to see emerging market currenciescontinue to outperform as global imbalances, which werepartly the cause of the global financial crisis, are righted. Thisoutperformance will also go hand in hand with economicgrowth – a key long-term fundamental driver of gold demand.Also, given the macroeconomic and financial events of the pastfew years, it would be foolhardy to believe that future crisesare unavoidable. Given the emerging markets’ growing shareof global trade, global wealth and investors’ global portfolios,it is logical to expect that any crises emanating from theseeconomies are likely to have a greater global impact. Based onits characteristics as a tail-risk hedge and liquid unit of exchange,gold should strongly react during periods of crisis. The casefor gold as a complement to a foreign-exchange hedge overlayremains strong – mitigating the cost drag from hedging whileproviding protection from tail events.Chart 15: Outperformance of portfolios with a 50% gold overlay on EM index*Basis points150Total outperformance: 240 basis points100500-50-100-1501997 Asianfinancial crisis1998 Russiadefault2002 ArgentinadefaultTotal outperformance: 111 basis pointsSeptember 11 2002 recession Global financialcrisisSovereign debtcrisis ISovereign debtcrisis II<strong>Gold</strong> overlay vs unhedged<strong>Gold</strong> overlay vs FX hedged* This chart shows the outperformance of a portfolio with 50% FX hedge/50% gold overlay EM index relative to two other portfolios: one with an unhedgedEM index and another one with a currency-hedged EM index. Please refer to Table 5 in Appendix III for event dates.Source: Barclays, Bloomberg, World <strong>Gold</strong> Council27 World <strong>Gold</strong> Council, <strong>Gold</strong>: hedging against tail risk, April 2010.<strong>Gold</strong> <strong>Investor</strong> | Risk management and capital preservation
Change language