Gold 'failing' as equity hedge, faces risks: Global money manager BlackRock

Global money manager BlackRock just delivered a double-barreled warning on the merits of holding traditional haven gold right now.

Bullion is proving to be a less effective hedge against moves in other assets, such as stocks, as well as inflation, according to Russ Koesterich, portfolio manager for BlackRock’s Global Allocation Fund. Moreover, gold faces headwinds should the recovery pick up pace, he warned in a blog post.

Gold is “failing as an equity hedge,” Koesterich said, noting its positive relationship with risky assets was even stronger when compared with tech stocks. He added: “Gold’s ability to hedge against inflation has been somewhat exaggerated. While it is a reasonable store of value over the very long-term — think centuries — it is less reliable across most investment horizons.”

Bullion has lost ground in 2021 as the recovery from the pandemic gains more traction and Treasury yields surge, although the haven has made a partial comeback this week. The typical case for holding the metal in a multi-asset portfolio is that it can help to balance out shifts in other holdings, especially equities. But BlackRock says that right now gold isn’t working well as a hedge against either stock moves or inflation risks, although it was against the dollar.

Spot gold is down more than 8 per cent this year, accompanied by a steady drawdown in holdings in gold-backed exchange-traded funds (ETFs), while banks have chopped price targets after the asset hit a record in 2020.

Global ETF volumes have sunk to the lowest since June, losing about 150 tons so far in 2021.

Among equity benchmarks, the S&P 500 Index has gained almost 4 per cent in 2021.

“While gold’s recent correlation with stocks and inflation has been positive to effectively zero, it is still demonstrating a strong, negative relationship with the dollar,” said Koesterich. “For this reason, gold should probably still be thought of as a dollar hedge.”

As leading economies seek to strengthen the recovery from the pandemic, Joe Biden’s $1.9 trillion Covid-19 relief bill cleared its final congressional hurdle Wednesday, with the House passing the bill on a 220-to-211 vote. That sends the measure to the U.S. president for his signature.

‘Prove a Headwind’

“More stimulus and improving vaccine distribution suggest the possibility of an economic surge,” he wrote. “Should this happen, real rates are likely to continue to rise from still historically depressed levels. As has been the case the past month, this will likely prove a headwind for gold.”

Bullion’s decline this year has been accompanied by a steady drawdown in holdings in gold-backed exchange-traded funds, while banks have chopped price targets after the asset hit a record in 2020. Global ETF volumes have sunk to the lowest since June, losing about 150 tons so far in 2021.

Banks paring forecasts include UBS Group AG and Goldman Sachs Group Inc., with the latter noting that the main reason behind gold’s underperformance is a strong rotation into risky assets on the back of a repricing of global growth. In January, ABN Amro Bank NV warned that gold had peaked and would drop.