Gold and Silver miners (Jr and Exploration)

[Edge83]

GLD: A Gold Hedge Against A Coming Recession?

Feb. 17, 2019 8:04 PM ET|18 comments | About: SPDR Gold Trust ETF (GLD)
John Engle

Summary
Gold has been a popular hedge for decades; during the past two bear markets, gold surged.

Signs of slowing economic growth amid Fed rate tightening and continued trade tensions have renewed interest in gold.

The SPDR Gold Trust is the best method of making a straight play on gold; as an ETF, it offers greater flexibility, convenience, and safety than the physical metal.

With recession fears looming, investors should consider GLD as a secure hedge against the broader market.

After years of smooth sailing, volatility has returned to capital markets in force. In the past few months, the seemingly unstoppable bull market has lost some of its footing. The market’s temper tantrum that followed the Federal Reserve’s decision to hike interest rates in December, along with escalating trade tensions between the United States and China, sparked widespread fears that a full-blown downturn might be on the horizon.

Things have since calmed down substantially. The Fed adopted a more dovish stance in January and trade talks have shown some signs of progress. These developments buoyed stocks in January and dispelled some of the worst fears of an imminent crisis.

Despite the recent reprieve, the market remains fragile. Fears continue to mount that a downturn is coming. In turn, this has sparked renewed investor interest in one of the classic hedges: gold.

The simplest and safest way of gaining exposure to bullion is through the SPDR Gold Trust ETF (GLD). With the risk factors mounting, investors would be wise to take steps to protect their portfolios from a crash. GLD is definitely worth a serious look.

The Case for Gold
Gold has long been a highly popular hedge against downturns. Interest has surged in recent months, as is often the case in times of economic and market uncertainty.

A study conducted by Cambria Investments compared the performance of various asset classes between 1986 and 2016, including gold. The study demonstrates the power - and limitations - of gold as a hedge against drops in the stock market.

Gold shines best in times of genuine crisis, performing exceptionally well during the past two bear markets. Between 2000 and 2003, stocks fell 42.5%. Over the same period, gold was up 27.6%. During the Great Recession bear market, gold rose 18.6% while stocks were down 51%.

Clearly, when the market gets battered by violent storms, gold offers a safe harbor.

Gold in 2019
After bottoming out at the turn of the century, gold surged over the next decade, especially during the financial crisis and subsequent Great Recession. The price dropped off again during the long bull market, though it is still far above its historic lows. As volatility has reared its ugly head in recent months, interest in gold has jumped as well, pushing prices up again.

An increasing number of experts and industry professionals have sounded off about the risk of a near-term downturn. Ray Dalio, the legendary founder of Bridgewater Associates, recently added his voice to the growing chorus of concern, warning that recession could hit in 2020.

We have already discussed how gold performed admirably during the past two bear markets, but can we expect a repeat in the event of a downturn in the near term? Gold is hardly super cheap right now, having remained well above historic lows even at this late stage of the growth cycle. Still, there is solid reason to believe that it could run up considerably higher in the event of a downturn.

The US dollar, a favorite hedge of international markets, is looking like an increasingly crowded trade. This has led many market participants to bet on gold as an alternative hedge. Central banks have been hard at work buying gold, with net purchases rising 74% in 2018. That is the biggest jump since 1971 when the US broke from the gold standard.

Gold’s growing luster in global markets support the current price, and it should surge further in the event of another downturn.

Investors’ Eye View
GLD is arguably the best method by which investors can gain exposure to gold. The ETF has tracked the underlying commodity closely.

Backed by bullion, it is undoubtedly the next best thing to owning physical gold. In fact, it may actually be better, since owning a tradable security offers far greater flexibility, while dodging the headaches of storing physical gold, be it bullion, coins, or something else.

GLD is up about 12% from its 2018 lows in August, and up nearly 3% year-to-date. But there is plenty of room to run. Indeed, GLD is down about 30% from its Great Recession highs. In the event of another bear market, GLD should have plenty of room to run.

As investors ponder modifications to their portfolio strategies and allocations in light of growing volatility and uncertainty, adding a bit of GLD as a hedge would not go amiss.

https://seekingalpha.com/article/4241784-gld-gold-hedge-coming-recession