I always believe in long-term wealth creation through investing in equities, especially in companies that have sound fundamentals and share the narratives that I believe to be successful in the future. I call it vibe-investing. I have been exposed to the S&P 500, especially the US and SEA tech stocks. However, the S&P 500 is often very volatile during periods of geopolitical and economic uncertainty. Therefore, I’ve been exploring ways to hedge my S&P 500 positions to achieve a more balanced portfolio that can tailor to my risk tolerance.
Gold as Equity Hedging
Gold often (but not always) moves inversely to equities in bear market. People often regard it as a safe asset that is able to protect their capital. People argue that it is safe as there is no counterparty risk in Gold (i.e. it’s immune to defaults). To be honest, the perception of gold being safe-haven during recession is due to history, psychology, and market behaviour, but I am no expert in this.
Gold is also regarded as a good hedge against inflation. The argument goes by the value of money in circulation has been traditionally tied to gold (even though USD follows FIAT system after 1971) as gold is precious and limited. For example, suppose in 2020 5 KG of gold = USD 1000 in circulation, and in 2025 5 KG of gold = USD 2000 in circulation, therefore the price of gold in 2025 is twice of its price in 2020, a pure yet simple hedge against inflation.
Ways to Invest in Gold
Easiest: Gold ETFs There are gold-backed ETFs such as SPDR Gold Shares (GLD), you can buy it through IBKR.These funds are directly backed by physical gold and allow you to get exposure to gold while not storing it.
Gold Mining Stocks Another alternative is through companies that mine gold. They have the benefit of giving leveraged exposure in a sense if the price of gold increases by 1x, the company’s profit can increase by more than 1x due to various factors such as company performance, growing market share, etc. But these companies also face risk such as operational risk, default risk, market volatility, lawsuit, etc. Some top gold mining stocks are Newmont (NYSE:NEM) which is the largest gold miner globally and Barrick (NYSE:GOLD) 2nd largest after Newmont.
Gold Futures Derivative to speculate on the future price of gold, they are usually traded in commodities exchanges such as COMEX (part of CME). Some gold futures require physical delivery like COMEX Gold Futures (i.e. you need to really buy/send gold) during the expiry date. Some are cash-settled like Mini Gold Futures - MCX (India), however I believe it depends on the future contracts themselves so I am not sure, most gold futures that I found are settled physically which is very tedious, so just don’t forget to roll over/close your position before expiry. Moreover, this is mainly used by professional commodities trader who have short-term view (maybe a few weeks to months) on gold.
The Most Tedious: Physical Gold Go to pasar, buy some gold. 5 months later, sell the gold again. Buy Low Sell High!!
Historical Performance of Gold Overall
- 1980 - 2000: Gold Price fell sharply, one of the reasons are due to booming equity markets, causing the money to flock there.
- 2001 - 2011: Major Bull Market, 650% increase. Mainly driven due to dot-com crash and GFC.
- 2011 - 2015: Another bull run for equities, price drop by 50%
- 2016 onwards: Gold bull run again, with average return of 7-10%/year.
Gold vs Equity
Note that there are years when Gold return is highly correlated with equities return.
There are times when both equity and gold rise together. For e.g. in 2024, the S&P 500 posted a return of ~25% and Gold of ~30%.
This can happen due to several reasons:
- Inflationary Growth (Goldilock Scenario): Company is growing and hence their equities, gold is used to hedge against inflation.
- Monetary Expansion & Cheap Liquidity: Free money for companies, VCs, Hedge funds, etc. Hence, high demand on equity markets, gold is used to hedge against inflation and currency debasement (i.e. the currency becomes worthless because of oversupply and losing confidence in the currency).
However, there are times when both equity and gold fall together, this happens especially during rate hike. Gold has no yield and people shift away from gold to Bond. Borrowing money becomes expensive and companies do not want to borrow as much, reducing the growth of companies.
Historical Performance during Recession
Generally moves inversely with equities.
- 2001 Dot-Com Crash: Gold up by 5-10%, followed by long-term bull run
- 2007-2009 GFC: Gold up by 25-30%
- 2020 Covid: Gold hits ATH in August 2020
TL;DR
Gold can act as equity hedge, especially during bear market. However, whether to include gold or not into your portfolio depend on your risk tolerance, how balance you want to the portfolio to be, etc.