Why People Like Gold Stocks During Market Volatility?

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Australian Economy, Macro Economics

With one round of market correction seen lately, it has been observed that Gold stocks generally outperform at the time of rising market volatility. This is generally reflected through the rise witnessed for the iShares Gold Trust and SPDR Gold Trust. Particularly, Gold is one of the best ways to protect the investors’ capital during the crises by holding the risk and has the potential to improve risk-adjusted returns with a broader portfolio. Recently, Gold was seen moving up with drop in Treasury bond yields and US Fed rate hike while market on the whole was shying away from good gains with commodity sector as an exception. ASX Gold stocks including Resolute Mining and Silver Lake Resources, for instance, surged up by 1.6% and 1.4%, respectively, on March 22, 2018.

 Gold is generally a good hedge during inflation and serves as a tool to curb the inflationary pressure. Further, gold has been seen to climb up at the time of crashes, for instance, when markets crashed by 56 per cent in the early 2000s for two full years, gold had an opposite tale to vouch for. In other words, Gold and broader equity markets are seen to be inversely correlated many a times. Gold tends to recover quickly during stock market crashes so when market goes down gold tends to rise and vice-versa. While stock markets’ behaviour is dependent on the economic growth and other macro factors and stability, gold in turn benefits the investors during the market shocks. If stocks perform well on the index, the need to grab gold related investments remains low. So to say, Gold is the only asset that grows when other assets typically fall during market shocks, so if economy moves towards any upheaval, one can evaluate to invest in gold. Gold gives a diversification benefit to one’s portfolio at the time of inflation and this could proffer a good strategy to punt on in order to manage risks.

 At the same time, it is important to understand that rise in equity volatility might not always lead to a stark rallying in gold. Some experts have highlighted that the investment in gold may not be very beneficial during short-term equity movements as opposed to the benefits witnessed during prolonged downturns.

 Looking at the market scenario for 2018, and despite the headwinds related to the sinusoidal stock market movement and hike in the interest rate, gold may provide good returns this year if investments are timed appropriately. The current sentiment on the yellow metal seems to be bullish and demand for gold is expected to rise in the coming months. Therefore, investors can benefit from this landscape in the long run by evaluating and investing in gold stocks that have proven fundamentals and good growth trajectory.


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