Global Allocation Insight

Rediscovering Gold

Nov 16, 2018

Why we see greater value in gold today.

The price movement of gold and global stocks has historically tended to be non-correlated (as illustrated in the chart below), making gold a useful diversifier of equity market risk. We have long held exposure to gold in the BlackRock Global Allocation Fund, which proved beneficial in October as stocks suffered their worst monthly drawdown in years while gold prices rallied.

After a prolonged period of weakness, we believe gold performed particularly well in October for several reasons:

Dollar stabilization. While the U.S. dollar Index is pushing against the upper end of its five-month range, the dollar has been relatively stable since May. This is important, as a rapidly strengthening dollar, as we witnessed last spring, has historically been a headwind for gold. To the extent the dollar has stabilized, this removes one headwind.

Real rates have plateaued. Besides the dollar, the biggest challenge for gold in 2018 has been rising real rates, i.e., interest rates adjusted for inflation. Higher real rates raise the opportunity cost of an asset that produces no income, such as gold. Between January and early October, real 10-year yields advanced by 50 basis points (0.50%), but seem to have temporarily peaked near the levels reached in 2013.

Return of volatility. While real rates and the dollar are key drivers for gold, demand for a “safe-haven” when volatility rises is also an important driver. Prior to the recent swoon, U.S. equities were well on their way toward another year of double-digit gains. However, with equity market volatility doubling since early October, gold prices have been on the rise.

Whether or not gold can continue its rally depends largely on the direction of the dollar, real rates and market volatility. Another dollar rally would likely interrupt gold’s recent strength. That said, absent another run up in the dollar, this environment of higher volatility, particularly one in which economic uncertainty is rising, as well as real rates remaining low around the world, is likely to bode well for gold as it has in the past. It is under these conditions, historically, in which gold has proved its value as a hedge.

Gold can help diversify a portfolio
The price movements of gold and global stocks are generally non-correlated, making gold a useful diversifier of equity market risk. (A correlation coefficient of zero represents non-correlated returns.)

Global healthcare spending on the rise

Source: Thomson Reuters Datastream, November 2018. One – year rolling correlation analysis based on daily returns with gold represented by the gold spot price (oz) and global stocks by the FTSE World Index.

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Russ Koesterich
Portfolio Manager, Global Allocation
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies ...
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